The debate over Basel III has now entered a new phase.
The regulatory framework built after the global financial crisis was designed to make the system for cross-border finance safer and more resilient. But nearly two decades later, a different set of concerns is coming into focus: Has the pursuit of financial stability been correctly calibrated to ensure domestic growth and competitiveness—and are reforms needed to better achieve the right balance between the two?
Although the United States, the United Kingdom (UK), and the European Union (EU) are approaching these questions from different starting points, how they pursue what is becoming known as regulatory “modernization” will ultimately help shape the next generation of financial standards and determine the future of international regulatory alignment.
In Washington, London, and Brussels, a regulatory reset is underway
On both sides of the Atlantic, authorities are reassessing the existing rules governing financial institutions in light of concerns about growth and competitiveness. The US has been at the forefront of this effort.
In summer 2025, Treasury Secretary Scott Bessent reemphasized the need for a fundamental revaluation of financial regulation. Over the following year, the US banking agencies pursued myriad regulatory priorities, including the notable review of the US prudential capital regime and the re-proposal of the Basel III endgame—the finalization of the Basel III accord. Long considered controversial and criticized in the US for issues such as gold-plating, the new proposal aims in part to simplify the regime by introducing a single set of risk-based capital calculations.
Liquidity requirements have also come under renewed scrutiny. Attention in the US has focused on the potential economic costs of liquidity risk oversight, reviving questions that emerged during the financial stress of the COVID-19 pandemic. In particular, analysts have questioned whether the short- and longer-term liquidity metrics under Basel III have led banks to hold liquidity buffers that are excessive or misaligned with the role they play in systemic resilience.
However, the debate extends beyond capital and liquidity. Questions about the transparency of bank stress tests, alongside notable changes to supervision and enforcement standards, point to a broader shift in how the world’s largest economy manages financial risk.
Unsurprisingly, all this activity has also helped to influence debates elsewhere. The Bank of England (BofE), for example, announced in July that it would make targeted capital adjustments to rebalance requirements for domestic banks relative to their foreign competitors, and the European Commission published a wider strategy on competitiveness in its banking sector. The Commission’s communication sets the stage for EU legislative deliberations in 2027 on aspects of the Basel prudential rulebook. It also followed earlier interventions by the European Banking Authority and the European Central Bank, both of which have called for simplifying parts of the single-market regulatory regime.
Taken together, these efforts suggest that the internationally aligned regulatory framework built over the past fifteen years is entering a period of significant change.
Modernization or overcorrection?
Will this rewriting of financial rules deliver benefits without unintended consequences? As reform efforts accelerate, debate is intensifying over whether they are properly calibrated—or whether some go too far.
Federal Reserve Vice Chair for Supervision Michelle Bowman, for instance, argues that robust bank capital levels can be maintained while reducing regulatory barriers that may harm credit availability without delivering commensurate stability benefits. Her position reflects a broader strategy that seeks to focus regulation and supervision on material financial risks while tailoring requirements to institutions’ risk profiles.
However, Governor Bowman’s predecessor and fellow member of the Fed Board Michael Barr takes a very different view. He has asserted that, rather than improving the framework to better support the economy, US regulatory efforts over the past year have shifted the balance too far toward deregulation, threatening the safety and soundness of financial intermediation. With the current proposals estimated to reduce capital requirements for the largest US banks by $60 billion, he argues that they could create a sizeable hole in the safety net needed to stabilize the financial system during future episodes of stress.
EU officials have also struck a more cautious tone. They maintain that it is essential not to jeopardize progress in correcting the deficiencies that contributed to the global financial crisis in the first place. A similar view has been expressed by BofE Governor and Financial Stability Board (FSB) Chair Andrew Bailey, who has emphasized that deregulation for its own sake is undesirable and that effective and proportionate regulation can play a significant role in promoting competitiveness. This suggests that the debate need not be framed as a choice between regulation and growth: well-designed rules can, in principle, support both a safe and efficient financial system.
Where does financial regulation go from here?
Though these debates over the purpose and effects of change will doubtless continue, the direction of travel is clear: the regulatory pendulum has swung, and reform is firmly on the agenda. The future of these efforts will likely depend on three key questions.
First, how far will reform go across jurisdictions? No other member of the Basel Committee or FSB has yet approached the scale of the work progressing in the US. Nevertheless, it is noteworthy that what has been tabled elsewhere arguably goes further than it would have just a few short years ago. The future pace and scope of adjustment will ultimately depend on the reforms countries prioritize, their international commitments, concerns about maintaining a level playing field, and the need to respond to internal and external economic pressures. Work underway this year by the FSB to assess jurisdictional regulatory modernization and consult on principles to guide that modernization could provide an important benchmark for the future direction of reform.
Second, can jurisdictional reforms deliver benefits for growth, competitiveness, and stability? Arguments have been put forward that easing requirements in the current economic environment could have negative countercyclical effects. And, as emphasized by Basel Committee Chair Eric Thedeen, financial regulation ultimately serves the real economy: a healthy banking system must be able to absorb shocks and continue supporting businesses and consumers. At the same time, it has been almost two decades since work began on the current international regulatory framework. Rules designed for a different risk and geopolitical environment will not always work perfectly—or as originally intended—today. Carefully calibrated modernization can capture the economic benefits of enhanced credit availability without weakening the safeguards that underpin financial stability.
Third, will international regulatory cooperation withstand increasingly independent reform efforts in major economies? Although the Basel standards have been adopted by around 70 percent of committee members, the ongoing jurisdictional reviews have also led some countries to take a wait-and-see approach to certain aspects of the regime. That risks further weakening and fragmenting what are intended to be common standards for financial institutions.
The challenge, then, is to strike a global balance between domestic reform priorities and international alignment while preserving the safe and effective functioning of cross-border finance. Whether that balance can be achieved will depend on the economic and political environment in which these reforms unfold.
Matthew L. Ekberg is a nonresident senior fellow at the Atlantic Council GeoEconomics Center and a former senior advisor and head of the London office for the Institute of International Finance.
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