By Hugh Carney
ABA Viewpoint
Last month, the Governors and Heads of Supervision — the oversight body of the Basel Committee on Banking Supervision — unanimously reaffirmed their commitment to implementing all aspects of the so-called Basel III endgame. For the United States, this signals an important inflection point. If U.S. regulators are serious about adopting the B3E standards, they must also be serious about cleaning up the regulatory layers that came before them.
This post continues our series looking at how U.S. regulators can use this moment to promote a more coherent and credible capital framework. While our last post focused on reforming the RCAP process to recognize the strength of the U.S. approach, this Viewpoint highlights the need to eliminate outdated, duplicative, and overly conservative rules that distort incentives and inflate capital requirements without corresponding benefits.
This is not about weakening prudential safeguards. On the contrary, it’s about promoting coherence, consistency and credibility in capital regulation. For more than a decade, U.S. banks have been subject to a Basel framework plus a growing patchwork of domestic enhancements, many of which either duplicate existing risk coverage or push capital requirements beyond what is justified by risk. If U.S. regulators are serious about adopting the Endgame reforms, they must also be serious about revisiting the legacy requirements that distort incentives, drive activities to the shadow banking sector, fragment international standards and raise the cost of financial intermediation and credit provisioning without clear benefits.
These reforms need to include:
1. Elimination or recalibration of G-SIB Method 2. Method 2 of the U.S. surcharge framework for global systemically important banks uses short-term wholesale funding as a proxy for systemic risk, creating inflated and redundant surcharges that go beyond the Basel standard. Removing or recalibrating this methodology would align the U.S. approach with international norms and eliminate a punitive layer of excess capital requirements.
2. Recalibration of the Enhanced Supplementary Leverage Ratio (eSLR). The current eSLR requirements are set at 5% for holding companies (3% base plus a 2% G-SIB buffer) and 6% at the insured depository institution level (3% base plus a 3% G-SIB buffer). These elevated thresholds distort balance sheet management and discourage low-risk intermediation, such as Treasury market activity and client clearing services. Aligning the calibration with the Basel standard, at 3% plus half of a bank’s G-SIB surcharge, would better balance resilience with market functionality while remaining consistent with international norms.
3. Tier 1 leverage ratio relief (elimination of the Collins Amendment). Some have claimed the Collins Amendment locks in the Tier 1 leverage ratio, which predates the Basel Supplementary Leverage Ratio, preventing regulators from tailoring requirements in a way that better reflects actual risk. Repealing the provision would assure regulators that they have the flexibility, flexibility they likely already possess in the absence of any congressional record indicating a contrary intent, to provide Tier 1 relief and reduce distortions created by overlapping capital constraints.
4. Calibration of the stress test to avoid double-counting. The Federal Reserve’s stress testing framework should be rationalized to eliminate redundancy with Basel standards. This includes removing or adjusting the global market shock component, which overlaps with the Basel Fundamental Review of the Trading Book; and eliminating or adjusting operational loss assumptions in the stress test, which are already captured under the Basel operational risk risk-weighted assets.
5. Indexing of tailoring thresholds. Moving forward with B3E also presents an opportunity to reevaluate the scoping provisions in the U.S. tailoring framework. Many of the current thresholds, such as those governing liquidity, capital and risk management requirements, are fixed in nominal dollar terms and have not been adjusted for inflation or growth in the banking sector. Indexing these thresholds would provide a more dynamic and risk-sensitive framework, ensuring that regulatory intensity scales appropriately with changes in the industry over time.
Taken together, these reforms would create a more streamlined, effective and credible capital regime that preserves the core strengths of the U.S. regulatory framework while eliminating inefficiencies that serve neither safety nor soundness. If the United States adopts the B3E reforms, it must do so with a commitment to coherence. That means not just layering new rules on top of old but finally doing the hard work of reconciling and removing those legacy requirements that no longer serve their intended purpose. The Basel III Endgame cannot live up to its name if it simply becomes another chapter in an already overcomplicated book.
ABA Viewpoint is the source for analysis, commentary and perspective from the American Bankers Association on the policy issues shaping banking today and into the future. Click here to view all posts in this series.
