Basel III Endgame is a set of proposed changes to how much capital the largest U.S. banks must hold against potential losses. It represents the final phase of international banking reforms that began after the 2008 financial crisis, translating global standards set by the Basel Committee on Banking Supervision into specific U.S. rules. The proposal has gone through significant revisions since it was first introduced in 2023, and its final form will shape how banks price loans, manage risk, and compete for years to come.
Where the Rules Come From
After the 2008 crisis exposed how dangerously thin bank capital cushions had become, regulators from major economies formed an agreement known as Basel III. The idea was straightforward: require banks to hold more of their own money (equity capital) relative to the risks on their books, so taxpayers aren’t on the hook when bets go bad. The “endgame” label refers to the final piece of that agreement, formally adopted by the Basel Committee in 2017, which standardizes how banks measure the riskiness of their assets.
In the U.S., three federal agencies are responsible for turning those international standards into binding rules: the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC. Their initial 2023 proposal drew intense pushback from the banking industry, leading to a substantially revised reproposal that softened many of the original requirements.
What Capital Requirements Actually Mean
Banks fund their operations with a mix of deposits, borrowed money, and shareholder equity. Capital requirements dictate the minimum amount of equity a bank must maintain relative to its risk-weighted assets. Risk-weighted assets are a way of scoring everything on a bank’s balance sheet by how likely it is to lose value. A U.S. Treasury bond gets a very low risk weight, while a speculative commercial loan gets a high one.
The key metric is called common equity tier 1 capital, or CET1. This is the highest-quality capital a bank holds: common stock and retained earnings. When regulators raise CET1 requirements, banks either need to retain more profits instead of paying dividends, raise new equity from investors, or shrink their balance sheets by making fewer loans and investments. Each of those choices has ripple effects on the broader economy.
Which Banks Are Affected
The revised proposal significantly narrowed which institutions fall under the new rules. Under the Federal Reserve’s existing “tailoring framework,” banks are grouped into categories based on size and complexity. The original 2023 proposal would have applied to all banking organizations with $100 billion or more in assets (Categories I through IV). The reproposal limits the core requirements to only Category I and II firms, which are the very largest and most internationally active banks.
Smaller banking organizations still see some changes through a companion “Standardized Approach Proposal,” but the requirements are less demanding. The threshold for “significant trading activity,” which triggers the most complex market risk calculations, was raised from $1 billion to $5 billion in trading assets. That change alone removed several banks from the most burdensome tier of compliance.
How the Reproposal Differs From 2023
The original proposal would have raised capital requirements for the largest banks by roughly 19%, according to industry estimates at the time. The revised version flips that trajectory entirely. Federal Reserve staff estimated the cumulative change in CET1 capital requirements under the reproposal as follows:
- Category I and II firms (the largest banks): a 4.8% decrease
- Category III and IV firms: a 5.2% decrease
- Smaller banking organizations: a 7.8% decrease
Several specific changes drove that shift. The reproposal replaces the old dual-calculation system, where large banks had to compute capital ratios two different ways and use the lower result, with a single calculation called the Expanded Risk-Based Approach (ERBA). This simplification alone removes a layer of conservatism that often forced banks to hold more capital than either method would have required on its own.
On mortgage lending, regulators dropped the requirement to deduct mortgage servicing assets from CET1 capital. Instead, those assets receive a 250% risk weight, which is still steep but less punitive than a full deduction. The reproposal also addressed double-counting concerns in market risk, where the original rules would have penalized the same trading exposures under both the new market risk framework (called FRTB, for Fundamental Review of the Trading Book) and the surcharge applied to globally significant banks.
Another practical change: certain dollar-based regulatory thresholds will now be indexed to inflation using the consumer price index, with adjustments every two years. This prevents the rules from becoming gradually more restrictive simply because asset values rise with inflation.
Effects on Mortgage Lending
Mortgage lending was one of the most contested areas of the original proposal. The risk weights assigned to some mortgages exceeded even the Basel Committee’s own international standards, and banks would have been required to hold more capital as a borrower’s loan-to-value ratio increased. On top of that, banks would have had to set aside capital under the operational risk provision for mortgages sold to Fannie Mae and Freddie Mac, even though those loans no longer sat on the bank’s balance sheet.
Fed Vice Chair Michael Barr estimated that the cost to banks of funding the average lending portfolio would rise by only 0.03 percentage points, a figure the industry called misleadingly small. Researchers at the Urban Institute argued that the capital banks would need to hold against mortgages was excessive at all loan-to-value levels and would discourage bank mortgage lending. They flagged a particular concern that the rules would disproportionately reduce lending to low and moderate income borrowers and communities of color, groups that regulators elsewhere in government were actively trying to reach.
The reproposal addressed some of these concerns, though mortgage risk weights remain higher than many in the industry wanted. The net effect will depend on the final rule’s details and how aggressively banks reprice their loan products in response.
Effects on Small Business and Corporate Lending
Critics of the original proposal argued that higher capital requirements would make it more expensive for banks to lend to small businesses and middle-market companies. Because these borrowers tend to carry higher risk weights than large public corporations, any increase in capital requirements hits them disproportionately. A letter signed by 38 Republican senators contended that the rules would disproportionately harm companies that are not publicly listed, including middle-market private firms and small businesses.
Supporters countered that well-capitalized banks are actually more willing to lend during downturns, not less. A bank with thin capital buffers may pull back from risky lending precisely when borrowers need it most. The reproposal’s lower overall capital impact softens the concern, but the tension between safety and credit availability remains at the heart of the debate.
How Banks Use Internal Models Under the New Rules
One of the Basel III Endgame’s core goals is reducing how much banks rely on their own internal models to calculate risk. Before the 2008 crisis, large banks used proprietary models that often produced lower risk estimates than standardized approaches, which meant they held less capital. The endgame rules push toward more standardized calculations that regulators can compare across institutions.
The reproposal, however, made the Internal Models Approach more attractive for market risk capital at the largest global banks. It relaxed requirements around which risk factors qualify for model-based treatment and eased the tests banks must pass to prove their models are accurate. It also removed the “output floor” for individual trading desks, which would have forced banks to calculate standardized capital even for desks approved to use internal models. For banks with sophisticated trading operations, this is a meaningful concession that lowers compliance costs and capital charges.
For larger regional banks that use ETF exposures for hedging, the reproposal lightened the operational burden of capitalizing those positions in a way that captures the hedging benefit. This includes simplified thresholds for how deeply a bank must analyze the individual holdings inside an ETF before applying a risk weight.
Where the Rulemaking Stands
The reproposal is open for public comment, and the final rule’s timeline remains uncertain. The agencies have signaled that the revised approach includes “modest deviations from the 2017 Basel agreement” designed to address issues specific to U.S. markets. Whether those deviations satisfy both international consistency goals and domestic industry concerns will determine how smoothly the final rule moves forward. Once finalized, banks will have a transition period to come into compliance, though the exact phase-in schedule will depend on the final text.