Rethinking Bank Capital: Toward a Smarter, More Resilient, and Globally Aligned Framework

As U.S. banking regulators grapple with the crossroads of resilience and reform, the July 2025 Federal Reserve conference marked a pivotal moment—signaling not just regulatory tweaks, but a bold shift toward a smarter, globally aligned capital framework for the future of finance.

1. Holistic Review and Integration of Capital Framework

• Purpose: The conference underscored the necessity of reviewing all major components of the bank capital framework—risk-based capital requirements, leverage ratios (including the enhanced supplementary leverage ratio, eSLR), GSIB surcharges, and stress testing—not in isolation but as interconnected pieces.
• Theme: Speakers consistently advocated cohesive, mutually supportive regulation to ensure a banking system that is safe, resilient and competitively neutral, while also enabling effective economic intermediation.

2. Leverage Ratio Reform Debates and Directions

• Panel Viewpoints: The leverage ratio, especially the enhanced Supplementary Leverage Ratio (eSLR), is under scrutiny regarding whether it still serves a unique purpose in a landscape now dominated by multiple risk- and stress-based requirements. The leverage ratio, originally meant as a backstop to risk-based requirements, now often acts as a binding constraint, even for low-risk assets such as Treasuries and central bank reserves. Some argued the leverage ratio remains a crucial safeguard against model risk, but most agree it should be reformed so it is not a binding constraint, especially for activities with low risk such as Treasury intermediation and custody services.
• Broad support was voiced for the Fed’s eSLR proposal to replace the current flat 2% add-on with a dynamic buffer equal to 50% of each bank's Method 1 GSIB surcharge. Many see this structure as better matched with the overall resolution framework and as a move that could ease constraints on balance sheet–intensive activities.

A controversial aspect was whether to exempt central bank reserves and Treasuries from the eSLR.

• Proponents of exemption argue that providing targeted relief would improve market functioning during periods of stress, making it easier for banks to intermediate Treasuries and maintain liquidity. There is widespread consensus that the current structure of the eSLR unintentionally discourages banks from supporting critical functions like Treasury market intermediation, especially during periods of market stress.
• Opponents worry that if the U.S. were to exempt these assets, it might encourage other jurisdictions to remove sovereign debt from their own leverage requirements, potentially undermining international consistency in capital frameworks.
• Indications from Fed officials and the lack of clear consensus during the conference suggest exemptions for Treasuries and reserves are unlikely to be included in the final rule.

Potential Evolution of the Leverage Ratio:

• Emphasis on Balance: Regulators likely to balance bank resilience with the ability to efficiently support market functioning, particularly for Treasuries and core liquidity services.
• Resolution and Holding Company Focus: Increasing alignment of capital requirements and resolution planning at the holding company level will likely persist, with an emphasis on groupwide flexibility but robust standards to avoid undermining stability.
• International Coordination: U.S. regulators will remain cautious about reforms that could fragment global standards; “gold plating” or unilateral exemptions may trigger competitive or stability risks abroad.
• Ongoing Engagement: The Fed emphasized openness to feedback, expert opinion, and data-driven policy changes, suggesting further rounds of consultation, transparency, and potential recalibration ahead.

Possible Reforms:

• Lowering the overall leverage requirement (favoured for systemic simplicity and capacity).
• Exempting Treasuries/cash from leverage exposure (favoured for specificity but with risks of international misalignment and risk arbitrage).
• Most experts stressed the importance of measuring impacts before adopting radical carve-outs, given global coordination needs and possible encouragement of risky behaviour if not calibrated correctly.

3. Resilience and Scenario Planning

• Countercyclical Tools: Panellists generally favoured permanent, structural, and predictable reforms (rather than “emergency only” tools) to better align incentives and avoid the need for ad hoc or ambiguous regulatory adjustments in times of stress.
• Holistic Risk Management: Multiple experts emphasized that capital, liquidity, interest rate risk, and resolution planning must be strong, complementary “legs” of the prudential framework—no single ratio or rule is sufficient by itself.

4. Impacts on Financial Stability

• GSIB Holding Companies vs Subsidiaries: The proposals would result in a meaningful reduction in required capital at operating (depository) subsidiaries, but a much smaller reduction at the top-tier holding company level. Panellists viewed this structure as positive for stability, given that resolutions and regulatory oversight are focused at the consolidated group (holding company) level. The holding company must retain enough flexibility to support troubled subsidiaries, as seen in post-crisis resolution frameworks.
• International Alignment: Several participated voiced concern that U.S. deviations from Basel norms could prompt retaliatory regulatory shifts abroad, fragmenting global standards and increasing risk of regulatory arbitrage.

5. Treasury Market Resilience

• Market Functioning: The design of leverage requirements was directly connected to ensuring that banks can serve as shock absorbers in the U.S. Treasury market under stress—an issue heightened by recent market disruptions such as March 2020.
• Optimal Solution?: Most panellists agreed there is no single “silver bullet”; market liquidity, bank behaviour, and overall systemic health depend on a suite of mutually reinforcing reforms, including central clearing, repo innovations, thoughtful use of the discount window, and private sector enhancements.

Unresolved Deep Structural Questions from Fed Conference

These unresolved structural questions suggest that, while there is momentum for reform, significant design, calibration, and harmonization decisions remain ahead. The answers will shape not only the future of U.S. bank regulation but also its impact on global financial stability and market functioning.

1. The Long-Term Role of the Leverage Ratio

• Debate continues over whether the leverage ratio should remain a “hard backstop” in the capital framework or be tailored so it is no longer the binding constraint, especially given the now-dominant risk-based and stress testing standards.
• Some stakeholders argue the leverage ratio remains vital for guarding against model risk, while others believe its role should be redefined or reduced as the overall system evolves.

2. Scope and Calibration of Exemptions (Treasuries and Reserves)

• A key unresolved issue is whether and how to exempt central bank reserves and Treasuries from leverage exposure.
• Proponents of exemptions stress benefits for market functioning during stress, but critics worry about eroding international consistency and sparking global “regulatory race to the bottom” if the U.S. moves unilaterally.

3. Alignment and Integration Across Regulatory Pillars

• There is ongoing debate about how to best align risk-based requirements, leverage ratios, stress testing (SCB), GSIB surcharges, and resolution planning into a coherent framework.
• Questions remain about whether standards and buffers (like the SCB) should be embedded in mandatory rules (Pillar 1), remain supervisory tools (Pillar 2), or be dynamically applied.

4. Structural Complexity and Volatility

• Industry and regulators are split on how to address complexity, overlap, and volatility created by overlapping capital charges—particularly the interaction between standardized requirements and stress tests.
• Suggestions include introducing a “two-stack” approach (standardized vs. stress test capital) or fundamentally redesigning buffer calculations.

5. International Consistency and Regulatory Arbitrage

• Concerns persist about how U.S. reforms, if not coordinated globally, could contribute to fragmentation of banking regulation and competitive disparities, spurring arbitrage or a shift of activities to less regulated sectors.
• There is no consensus yet on how to pursue modernization without undermining the coherence of international standards.

6. Tailoring by Firm Size and Complexity

• The question remains whether leverage and other capital requirements should be more finely tailored to bank size, structure, or systemic importance, rather than applying mostly uniform rules across all large institutions.

Educated Guess: Future Outlook & Direction of U.S. Basel III Endgame

The Basel III endgame proposal was widely critiqued by conference participants for introducing excessive complexity into the U.S. capital framework. Conference speakers linked the proposal’s structure to real-world consequences: overlap and high buffers can discourage banks from providing market liquidity—especially in the U.S. Treasury market—pushing key financial activities into less regulated parts of the system. Many attendees emphasized the problem of overlapping requirements between standardized capital charges and stress test-based buffers—arguing that this duplication unnecessarily increases capital demands and incentivizes banks to withdraw from certain business lines, sometimes driving activity to the nonbank sector. Industry voices consistently called out that the sheer complexity and “gold-plating” (adding extra requirements above international standards) undermine both the competitiveness of U.S. banks and the clarity of the framework.

One of the most debated issues was the misalignment between the U.S. approach and global Basel standards. The U.S. proposal is perceived as stricter (“gold-plated”) compared to international peers, resulting in competitive disadvantages for U.S. global systemically important banks (GSIBs). There was apprehension that deviating too far from Basel norms could trigger similar actions by other jurisdictions, leading to fragmentation of standards and an increased risk of regulatory arbitrage.

Participants advocated for a more integrated approach to capital requirements, such as a "two-stack" model that would more clearly separate standardized and stress test-based requirements, reducing duplicative capital buffers. There was significant momentum behind the idea that standardized rules and stress testing frameworks should be better aligned to avoid unnecessary overlap. Many urged regulators to align the U.S. proposal more closely with global timelines and methodologies, reducing the risk of cross-border inconsistencies.

Broader Trends Emerging from the Conference:

• Push for Simplification: A key takeaway is the likely move toward simplifying and rationalizing the Basel III endgame approach, potentially by streamlining overlapping requirements and buffers. The probability of a “two-stack” capital regime—clearly demarcating standardized and stress-based requirements—has increased, as has the demand for greater transparency and predictability.
• Recalibration, Not Abandonment: Rather than abandoning the endgame, expect the Fed to repropose or recalibrate it—maintaining core Basel commitments but moderating elements that disproportionately impact U.S. competitiveness or operational efficiency.
• Greater Global Alignment: Regulators are likely to engage more with international peers, aiming to minimize divergences from Basel standards and avoid sparking global fragmentation or competitive disadvantages for U.S. banks.
• Operational Flexibility: The Fed may pivot towards frameworks that allow more flexibility for banks to support critical market functions during stress (e.g., Treasury intermediation) without breaching capital requirements due to duplicative rules.

Overall, the conference highlighted a sector-wide push for smarter, more adaptive, and internationally consistent regulation that maintains the U.S. banking system’s robustness while promoting its critical economic functions—even and especially in times of stress.

Clues on Possible Finalization Dates for Key U.S. Bank Regulatory Proposals

The conference proceedings did not specify an exact publication date for the final Basel III endgame proposals by the Federal Reserve. While the discussions acknowledged momentum toward a re-proposal or finalization aimed at aligning with global standards and reducing duplicative charges, there was no concrete announcement or commitment regarding when the final rules would be published. Expect publication of final rules as soon as agencies process comments (likely late 2025), with implementation of Basel III endgame and staggered phasing of eSLR and stress testing reforms to follow closely thereafter.

Enhanced Supplementary Leverage Ratio (eSLR) Proposal

• Comment Deadline: The formal comment period for the eSLR proposal closes on August 26, 2025. This signals that the rule will not be finalized before late August 2025 at the earliest.
• Final Rule Outlook: The agencies will likely need several weeks to months to review comments and publish a final rule, so finalization may occur in late 2025 or possibly stretch into early 2026, depending on the process.

Stress Testing Proposal

• Recent Proposals: The Federal Reserve published a stress testing reform proposal in April 2025. The initial comment deadline was 60 days post-publication (around June 2025), and the Fed has indicated it plans further proposals—especially around transparency and scenario design—later this year, with a specific follow-up proposal expected by September 30, 2025.
• Final Rule Outlook: There is an intention to phase in changes on the stress capital buffer (SCB) and scenario mechanisms starting as early as January 1, 2026, but the precise publication date for final rules will depend on the pace of further consultations and responses to public comment

Expect the U.S. Basel III endgame proposal to evolve toward a more balanced, less complex framework—focused on reducing unnecessary overlap, coordinating globally, and ensuring banks can fulfil both their resilience and market-intermediation roles. Industry and regulatory consensus suggest forthcoming revisions that address volatility, streamline buffers, and better integrate stress testing and standardized capital requirements, strengthening the alignment between U.S. and international standards while preserving financial stability and market functioning.