Trump Administration to Release New Banking Rules After Industry Pushback

Federal regulators under President Trump plan to unveil revised banking capital requirements this month, scaling back controversial rules first proposed in 2023. The new "Basel Endgame" regulations will moderately reduce capital requirements for many banks following intense Wall Street opposition.

Federal banking regulators working under President Trump are set to release revised capital requirements this month that will reshape how major financial institutions calculate risk and determine reserve funds for potential losses.

The updated “Basel Endgame” regulations have generated significant debate since their initial introduction in 2023 during the Biden administration, prompting fierce resistance from major Wall Street institutions who argued the rules would damage lending practices and economic growth.

However, opponents of the banking industry contend that financial institutions currently hold substantial cash reserves and that modifications to these regulations would undermine important protections established following the 2007-09 financial crisis, particularly as geopolitical tensions from Iran-related conflicts and declining private credit markets create market instability.

Federal Reserve Vice Chair for Supervision Michelle Bowman announced Thursday that the revised proposal, when paired with adjustments to additional capital regulations, will moderately decrease capital requirements for numerous lending institutions.

Understanding the Basel Framework

The Basel Committee on Banking Supervision operates under the Bank for International Settlements in Basel, Switzerland, working to establish consistent global minimum capital standards that enable banks to withstand loan defaults during economic downturns.

Following the 2007-09 worldwide financial crisis, the committee developed the “Basel III” framework, incorporating multiple capital, leverage and liquidity mandates for banking institutions. International regulators have spent years implementing these standards, with the “endgame” version, finalized in 2017, representing the concluding phase.

The Federal Reserve spearheads this initiative in America, collaborating with the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency.

Reasons for the New Proposal

The initial 2023 Basel proposal, developed under Bowman’s Democratic predecessor Michael Barr, suggested increasing capital by 16%. Major banks warned this could elevate their requirements by up to 20%. This surprised the financial sector, which anticipated the regulation would redistribute capital while maintaining relatively stable overall amounts.

Banking institutions responded with an extraordinary lobbying campaign and public relations effort, including attack advertisements during football broadcasts, claiming the regulations were unwarranted since banks already maintained adequate capital levels and would harm lending, small businesses and economic growth. Financial institutions also threatened legal action.

Barr committed to revising the regulation, but the three regulatory agencies failed to reach consensus on implementation, allowing the matter to transition to the Trump administration, which has typically supported industry positions.

Proposal Objectives and Expected Effects

The American proposal would restructure how large banks assess risk and subsequently determine appropriate capital reserves against potential losses. Primary focus areas include credit risk, market risk and operational risk.

Bowman stated Thursday that the new proposal would “right-size” requirements to better address risks while reducing redundancies. The modifications would also provide banks relief for activities regulators consider less risky and wish to encourage, including mortgage lending.

For smaller banking institutions, the plan would establish new standardized risk measurements that would “moderately reduce” their requirements and promote lending activities.

Overall, Basel regulations are still anticipated to slightly increase capital for the largest, highest-risk banks. However, when combined with changes to surcharges imposed on risky global or “GSIB” American banks, capital at major Wall Street institutions would decrease by “a small amount,” according to Bowman.

The GSIB Surcharge Explained

The GSIB surcharge mandates that eight major American banks considered globally risky maintain additional capital reserves. These large institutions have long advocated for updates to the surcharge calculation methodology.

Bowman announced Thursday that the Fed intends to update certain calculation components, which remained fixed since 2015, to account for economic growth and more accurately represent bank size relative to the global economy. The Fed had previously considered this modification, but efforts stalled during the broader Basel controversy.

The Fed also plans to adjust requirements for reserves related to short-term funding risks, as Bowman argued these had become more expensive than originally anticipated.

Opposition Perspectives

While regulatory specialists acknowledge the reasonableness of questioning capital allocation methods, many argue that current system-wide amounts are appropriate and that reducing capital and liquidity mechanisms will ultimately weaken financial system protections. Thursday, Democratic Senator Elizabeth Warren, who helped develop regulations implemented after the 2007-09 crisis, stated the changes endanger the economy.

Research conducted by Stephen Cecchetti, a Brandeis International Business School professor who analyzed comprehensive Fed loan data spanning more than ten years, discovered no clear evidence that higher bank capital requirements resulted in reduced lending by American banks, Reuters reported in 2024. Cecchetti also contributed to post-crisis Basel rule development.

Future Steps

Bowman indicated the Fed will vote on the proposals shortly and public feedback will be accepted. Regulators have expressed intentions to proceed quickly, but the proposals are extensive and complex, potentially requiring many months to finalize drafts.