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Policymakers on both sides of the Atlantic are re‑opening the post‑crisis capital debate. In the European Union, officials are preparing to delay the impact of tougher market‑risk rules under the Fundamental Review of the Trading Book (FRTB), giving banks temporary relief from higher trading‑book capital. In the United States, the Federal Reserve and other agencies have unveiled a sweeping capital rewrite that would lower common equity tier 1 requirements by roughly 4.8% for the largest banks and even more for regionals and community lenders.
TL;DR
- The EU plans to delay or soften the capital impact of FRTB, likely using a temporary multiplier to neutralise higher trading‑book requirements for up to three years.
- US regulators have scrapped their 2023 “Basel endgame” draft and replaced it with a streamlined framework that reduces CET1 capital for GSIBs by about 4.8% on average, and by 5–8% for smaller banks.
- Both moves are framed as “modernisation” and competitiveness measures, not deregulation.
- The open question is whether this marks a controlled recalibration of bank capital or the start of a slower, harder‑to‑see erosion of the post‑crisis buffer.
EU: Delaying FRTB to Protect Competitiveness
Reports from the Financial Times and others indicate that the EU is once again preparing to delay the full impact of FRTB‑related capital hikes. FRTB, the Basel‑driven overhaul of market‑risk capital, was designed to make trading‑book capital more risk‑sensitive and to close gaps exposed during past crises.
Key elements of the EU approach:
- policymakers are considering a temporary multiplier that would offset the rise in trading‑book capital requirements for up to three years;
- decisions on the exact calibration are expected only after Easter 2026, extending uncertainty for banks;
- officials are explicitly worried about putting EU banks at a competitive disadvantage if the US does not implement comparable rules on the same timeline.
In simple terms, Brussels is trying to square Basel commitments with fears that its banks could be over‑capitalised relative to US peers.
US: A Capital Rewrite That Lowers CET1
Across the Atlantic, US regulators have gone further. In March, the Federal Reserve, FDIC and OCC abandoned their controversial 2023 capital proposal and issued a new, streamlined framework. According to analysis of the new plan:
- the largest global systemically important banks (GSIBs) would see their CET1 capital requirements fall by approximately 4.8%,
- smaller regional banks and community banks could see reductions of about 5.2% and 7.8%, respectively;
- the agencies describe the shift as “modernising” capital rules rather than tightening them.
Structural changes include:
- mandatory inclusion of accumulated other comprehensive income (AOCI) in capital for Category III/IV banks, phased in from 2027;
- eliminating certain mortgage servicing asset (MSA) capital deductions and replacing them with a 250% risk weight;
- moving market‑risk measures from value‑at‑risk to expected shortfall and introducing CVA capital charges.
In practice, the US is accepting some targeted risk‑sensitivity changes while delivering a net capital cut.
Two Systems, One Direction: Softer Margins at the Edge
Taken together, the EU and US moves are not identical, but they point in the same direction:
- In the EU, the emphasis is on delaying and smoothing the impact of new rules (FRTB), using transitional devices like multipliers.
- In the US, regulators are explicitly lowering capital from where the 2023 draft would have landed, citing concerns about credit availability, competitiveness and migration of activities outside the banking system.
Both are responding to similar pressures:
- concerns that banks face rising demands from markets, digital transformation and climate/transition risks;
- fears that too‑aggressive capital increases would disadvantage domestic banks relative to global peers;
- political fatigue with post‑crisis tightening and growing focus on growth and competitiveness.
For banks, the near‑term message is that headline capital ratios will be kinder than previously feared — especially on trading and some credit exposures.
Competitiveness vs Resilience: The Trade‑Off
The core debate is whether these changes are a sensible correction or a step too far. Supporters argue that:
- previous proposals, especially in the US, would have overshot and pushed activity into less regulated channels;
- well‑capitalised banks with strong liquidity and stress‑testing track records can afford modest CET1 reductions;
- better‑targeted, risk‑sensitive rules are more effective than blunt capital surcharges.
Critics counter that:
- gradual, multi‑step relaxations are harder to monitor than one big rollback;
- delaying FRTB again risks undermining the credibility of the Basel framework and leaving market‑risk capital under‑aligned with reality;
- lower capital in a world of higher macro and geopolitical volatility may leave banks with less cushion if tail risks materialise.
In simple terms, we are moving from a world of “never again under‑capitalised” toward “let’s not overshoot” — a subtle but important shift.
What This Means for Banks and Investors
For banks
- Near‑term capital relief gives more room for lending, trading and shareholder distributions, especially in trading‑heavy EU banks and large US institutions.
- However, uncertainty about final calibrations (EU FRTB multipliers, US comment‑period changes) means capital planning still has to incorporate multiple scenarios.
- Supervisory focus may tilt further toward non‑capital tools: stress tests, liquidity requirements, governance expectations and model‑risk controls.
For investors
- Lower‑than‑feared capital demands can support valuations and payout expectations in the short run.
- At the same time, investors will need to re‑examine downside scenarios: with thinner buffers at the margin, how do banks perform under adverse macro or market‑shock paths?
Put differently, the regulatory floor is inching down just as the macro ceiling — long‑run growth and inflation predictability — is also lower.
Quick Q&A
Is this a global rollback of Basel III?
Not formally. Basel III remains the reference, but the EU is stretching timelines and using transitional relief tools, while the US is choosing a lighter implementation than its 2023 draft would have delivered.
Why is the EU delaying FRTB’s capital impact?
EU authorities fear that a full, immediate FRTB shock would push trading‑book capital sharply higher and hurt the competitiveness of European banks versus US peers that have not yet implemented comparable requirements.
How big is the US capital cut in practice?
Analysts estimate CET1 requirements falling by about 4.8% for GSIBs and by 5–8% for regional and community banks, relative to current levels and the scrapped 2023 proposal.
What should banks do now?
Use the breathing room to strengthen risk management and IT infrastructure, model multiple regulatory‑capital scenarios, and avoid treating transitional relief as a licence to aggressively re‑lever trading books.
What’s the main risk of these changes?
That a series of small, politically palatable capital relaxations and delays add up to a meaningful erosion of resilience just as the global environment becomes more volatile.
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