Banking and Finance Law Daily Wrap Up, CAPITAL AND BASEL ACCORDS—Senators push Fed to avoid ‘elevated‘ capital requirements in Basel III rulemaking, (Nov 7, 2025)

By Jeff Williams

The Republican senators expressed concerns that some changes under consideration could constrain consumer and business access to capital and raise costs.

As the Board of Governors of the Federal Reserve works to finalize its Basel III Endgame rulemaking, Senate Banking Committee Chairman Tim Scott (R-S.C.), and the other Republican members of the committee have sent a letter to Fed Chairman Jerome Powell and Fed Vice Chair for Supervision Michelle Bowman urging the Fed to “view capital requirements holistically” and address concerns they have about the original endgame proposal, including the “structural overcapitalization of risks arising from the application of certain Basel Committee standards already accounted for.”

As part of the rulemaking effort, the Fed should “endeavor to make sure that any proposal uses the baseline that existed before the post-pandemic capital ramp-up, not relative to today's elevated capital levels,” according to the senators, which also included Mike Crapo (R-Idaho), Thom Tillis (R-N.C.), John Kennedy (R-La.), Bill Hagerty (R-Tenn.), Cynthia Lummis (R-Wyo.), Katie Britt (R-Ala.), Pete Ricketts (R-Neb.), Kevin Cramer (R-N.D.), Bernie Moreno (R-Ohio), and Dave McCormick (R-Pa.).

Rather than increased risk, a more than 20 percent rise in aggregate common equity tier 1 ratios for large U.S. banks since 2020 has been “driven in part by the growth of the Board’s balance sheet and the economy,” they said, adding: “Using current capital levels as the reference point would institutionalize excessive requirements, leading to higher costs and less access to capital for U.S. consumers and small businesses.”

The senators also told Powell that the Fed should avoid “structural duplication in the reproposal,” saying that the “originally proposed Basel III Endgame rule was impracticable and would have increased aggregate bank capital requirements by roughly 25 percent.” The "dual-stack construct” of the original proposal to apply both Basel’s expanded risk-based approach and the legacy U.S. standardized approach “creates unnecessary redundancy.” Because the expanded risk-based approach “would almost always serve as the binding constraint, inflating risk-weighted assets (RWAs) and then layering the Stress Capital Buffer (SCB) on top would compound capital requirements well beyond what Basel intended,” the senators said.

In addition, they asked the Fed to avoid imposing “redundant operational risk RWAs that would elevate aggregate capital requirements well above losses observed even in several historical scenarios.” Adding a separate standardized operational risk charge along with a SCB would “result in overcapitalizing the same underlying loss exposure,” they said, adding: “Historical stress test data shows that operational risk losses are already capitalized in stress losses via the SCB.”

The senators also requested that the Fed “reassess the punitive weighting” of the p-factor of its securitization framework at 1.0 and instead maintain it at or below the current 0.5. “The existing calibration, adopted in 2013, appropriately differentiates between on-balance-sheet lending and securitized exposures by making sure that banks hold additional capital to account for the structural features of securitizations,” they wrote. “Doubling the p-factor to 1.0 would reduce risk sensitivity by treating the securitization of higher-quality assets as if they carried similar risk as less-stable pools. The change would increase funding costs for consumers and small businesses and constrain market liquidity.”

The Fed’s assessment in its April Financial Stability Report that the banking sector “remained sound and resilient” overall “underscores that the existing framework already supports a resilient banking sector” and implementing a “further across-the-board" increase in capital through the p-factor or other duplicative mechanisms would not materially enhance stability but would impair credit intermediation.”

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