Basel III endgame: The specter of global regulatory fragmentation
As memories of the 2008 global financial crisis fade to gray, international financial regulations are becoming another source of uncertainty. Inconsistent implementation of the Basel III endgame is a case in point. The resulting unpredictable regulations could pose risks to international financial stability, especially considering recent financial market turmoil triggered by the tariff war.
The Basel III endgame was born out of the Basel III accord, which was created by a group of countries with strong financial sectors in response to the 2008 crisis and first implemented by US and other regulators in 2013. The accord provides a package of international financial regulatory standards for banks to stabilize them and mitigate the chance of another major financial disaster. The endgame includes the final set of recommendations to implement the Basel III accord, and was scheduled to be fully implemented by January 1, 2023.
However, the Basel III endgame has been disrupted by countries delaying implementation dates and tailoring recommendations to their own national interests. The trend over the last seventeen years toward national competitiveness gaining ground over coordinated regulations—most noticeable in the United States—could fragment the Basel III endgame and the global financial regulatory framework more broadly.
The Basel III endgame in the United States
On July 27, 2023, the US federal banking regulators—including the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve (Fed)—jointly proposed rules to implement the Basel III endgame. The Fed vice chair for banking regulation, Micheal Barr, also issued proposals applicable to banks with more than $100 billion of assets. By changing the calculation of risk-weighted assets, the proposed rules would raise the core equity tier 1 (CET1) capital for large and complex banks by 16 percent, and tier 1 capital by 6 percent. CET1 comprises of a bank’s common equity, retained earnings and other regulatory adjustments, representing the core and highest quality capital of a bank available to absorb losses.
According to the Fed, the average CET1 ratio of large US banks is currently around 13 percent. It already exceeds the minimum required ratio of 4.5 percent, in addition to stress capital buffer requirements and global systemically important banks (GSIBs) surcharges. —ranging from 13.63 percent for Citigroup, 15.68 percent for JPMorgan Chase, and 15.92 percent for Morgan Stanley.
The US banking industry, especially the large banks, objected to the rules proposed in 2023 that would have “gold plated” the Basel III agreed standards and raised the special GSIB surcharge by $250 billion. The fact that the scope of the supplementary liquidity ratio of 3 percent currently includes non- or low-risk assets such as US Treasury securities has drawn particular frustration. Their inclusion boosts the required capital level and makes it costly for banks to commit capital in their broker-dealer activities needed to support a smooth functioning of the US Treasury market. The new rules would also reduce banks’ reliance on their internal models to calculate risk-weighted assets. Opaque internal justifications by US agencies for these new rules, on top of the conduction of the annual bank stress test, have prompted sharp criticism from influential banks.
These objections have persuaded US financial regulators to consider revising the proposed rules, essentially to half the average increase in required capital for large and complex banks. They may even remove US Treasuries from the calculation of the supplementary liquidity ratio, reduce the GSIB surcharge, and release more information about the regulators’ internal analyses—including for the stress test.
Motivated by the Trump administration’s approach to deregulation, Michael Barr has been replaced as vice chair for supervision by Michelle Bowman, who is more sympathetic to the banks’ views. Under such a supportive regulatory environment, large banks are arguing to fully implement the modified Basel III endgame now, so that the net impact will be capital neutral—meaning there would be no change in the capital requirements for major banks—rather than leaving it open risking a possible future Democratic administration favoring a stricter regulatory framework. Travis Hill, the acting chair of the FDIC, has revealed his agenda of priorities, aiming to review all FDIC regulations, guidances and manuals, especially to streamline capital and liquidity rules in opposition to the Basel III Endgame—potentially opening more room for banks to seek further relaxation of Basel III standards.
European Banks Pushing for Similar Delay
Uncertainty in the United States has already encouraged European banks to push for delayed implementation of their own new rulebook, the Fundamental Review of the Trading Book (FRTB), to avoid being put at a competitive disadvantage.
The deferral has already been granted in the United Kingdom, where the Prudential Regulation Authority has postponed implementation of new regulations until January 1, 2027. The focus of most large banks in the European Union (EU) has turned to postponing the adoption of the new trading book rules by another year past the already extended target date of 2026—in the context of delays in the US and UK. The delay’s supporters hope to gain the time needed to make adjustments to the trading book regulation and render it capital neutral.
Currently, the aggregate CET1 ratio of EU banks is 15.73%; however the aggregate CET1 ratio of EU GSIBs is lower at 14.30%.
Pressure by large banks has encouraged the European Commission to launch a public consultation on the EU approach to implementing the FRTB, including raising the option of postponing the application date to January 1, 2027. Doing so is part of an effort to ensure a level playing field and keep EU banks competitive as compared to UK banks and US banks, which face unpredictable levels of regulation under the Trump administration.
Canada has implemented Basel III as well. However, its Office of the Superintendent of Financial Institutions has also indefinitely delayed increases to the Basel III capital floor, citing tariff-induced economic uncertainty and slow progress by other countries. Failure to implement the capital floor could seriously dilute Basel III if other countries follow suit. By comparison, Japan and Switzerland have fully implemented Basel III standards in their domestic regulatory frameworks.
Divergent implementation timelines and an uneven regulatory landscape have raised concerns about global regulatory fragmentation. Widespread fragmentation of trade and investment flows driven by heightened geopolitical tension have undermined international trust and willingness to cooperate across national borders. With the combination of these factors, the overall trend toward global regulatory fragmentation will pose growing risks to international financial stability and should be closely monitored by the financial regulators of major countries.
Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center and senior fellow at the Policy Center for the New South. Formerly, he served as a senior official at the International Institute of Finance and International Monetary Fund.
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Image: Basel, SWITZERLAND : Bank for International Settlements BIS, the tower building of the international financial institution owned by 60 central banks, operating in Basel since 1903.