Senior U.S. officials frame their financial regulatory objectives with words like recalibrate, harmonize, and Americanize. The last, from Deputy Treasury Secretary Michael Faulkender, sounds particularly provocative in an “America first” political moment.
Big U.S. banks’ complaints that Basel III capital requirements are excessive and put them at a competitive disadvantage, and policymakers’ receptivity to them, stoked fears of fragmentation in the international reform consensus forged after the 2008 financial crisis. The Trump administration has set sweeping regulatory – or deregulatory – goals while also accommodating, or welcoming continued inclusion in, the Basel Committee on Banking Supervision and other components of global collaboration.
As Faulkender stressed during a June 20 fireside-chat-style appearance at the Council on Foreign Relations, “international homogeneity” must not detract from America's proficiency at financing businesses and individuals. He contrasted that with jurisdictions geared more toward financing of governments.
The Basel process has made “important strides,” said Faulkender, a former University of Maryland professor and America First Policy Institute chief economist who was confirmed by the Senate in March to the No. 2 Treasury post under Secretary Scott Bessent.
There is willingness to work with “international and Basel partners” on areas of alignment, Faulkender stated, “but there are other areas where we just don't think that it's going to be appropriate.” That is where it will be necessary to “Americanize” and “insist on some differences.”
Noting that the U.S. economy is 25% larger than Europe’s, after the two were about equal at the turn of the century, Faulkender added, “We don’t want to move toward a European approach to economic policy.”
Deputy Secretary Faulkender: Make the regulated sector better.
Instead, the U.S. is pursuing a broad “modernization agenda” recognizing, in holistic fashion, the need to address imbalances or make course corrections in everything from bank capital and regulation, to taxation and trade, even to aspects of the Anti-Money Laundering Act of 2020 yet to be implemented. Being “influential and in the lead,” as Faulkender put it, serves U.S. global interests in payments standards, cryptocurrencies and artificial intelligence.
He contended that the best way to keep lending from diminishing or migrating to the shadow sector is to “make the regulated sector work better such that capital doesn’t flee in the first place.”
Resistance to Basel III endgame provisions had been building since well before Donald Trump was elected president, along with Republican congressional majorities, last November. Organizations such as the Bank Policy Institute and Financial Services Forum justified their member banks’ objections with projections of adverse impacts on the real economy and Main Street.
Representative Andy Barr of Kentucky, chairman of the House Financial Services Committee’s Financial Institutions and Monetary Policy subcommittee, in a September hearing and proposed bill took specific aim at alleged lack of accountability and transparency in U.S. regulators’ participation in the Basel Committee on Banking Supervision and Bank for International Settlements. (See The U.S. and the Basel Endgame: Distancing or Decoupling?)
Meanwhile, the multilateral bodies were reasserting post-crisis reform principles and Basel III endgame priorities. These were underscored in a June 12 speech in Spain by Netherlands central bank president Klaas Knot, the last in his capacity as chair of the Financial Stability Board. That coordinating body is hosted by the BIS in Basel, Switzerland, and includes representatives of the U.S Treasury, Federal Reserve Board and Securities and Exchange Commission.
The final Basel III standards “are designed to strengthen the resilience of banks to withstand losses. And yet, they still have not been implemented in many jurisdictions,” said Knot, adding that “more than 15 years after the global financial crisis, authorities still face challenges in dealing with failing banks. So yes, we’ve made progress. But we’re not done.”
Klaas Knot: Global cooperation “harder but more essential.”
Knot urged that any simplified rules be “calibrated at a more prudent level” to prevent their becoming less risk-sensitive. “That is the general thinking behind the standardized approach of Basel III. That is also the thinking behind the leverage ratio. Most importantly, what we must avoid is confusing simplification with deregulation” and rollbacks that would increase the likelihood of crises and “undo the progress we have made.”
“If we want to meet today’s challenges to financial stability, we have to continue to work together,” Knot pleaded. “And we need to stay committed to the international bodies we have built to underpin that cooperation, such as the Basel Committee and the FSB. In a fragmented world, global cooperation is harder. But it is also more essential.”
Effective July 1, the Dutchman was succeeded as FSB chair by Bank of England Governor Andrew Bailey.
The FSB in June appointed Randal Quarles to lead a high-level review of “15 years of reform implementation,” for a report to the G20 next year. Quarles was a Federal Reserve Board governor from October 2017 to October 2021, serving as its first vice chair for supervision, and was FSB chair from December 2018 until December 2021.
Michelle Bowman, sworn in on June 9 as the Fed’s vice chair for supervision – a position vacated in February by Michael Barr, still a sitting Fed governor – bolstered the Republican administration’s contingent of “recalibration” advocates. A former Kansas bank commissioner and a community banker in that state, Bowman has been on the Federal Reserve Board since 2018, but now has a higher profile with a regulatory mandate assigned by the 2010 Dodd-Frank Act.
She titled a January 2024 speech The Path Forward for Bank Capital Reform, saying that the goal of greater international comparability “is frustrated when U.S. regulators over-calibrate requirements, at a level in excess of international peers and not supported by proportionate levels of risk . . . One approach to mitigate the spread of financial stability risks is to promote minimum standards across jurisdictions that not only improve competitive equity in banking markets but that also make the financial system safer.”
The U.S. regulators’ 2023 endgame proposal “reflects elements of the agreed upon Basel standards,” Bowman said, “but it far exceeds those agreed standards. Adjusting the calibration of the Basel capital reform proposal would have the important secondary benefit of enhancing this international consistency.”
Michelle Bowman: “Long overdue follow-up.”
Two days after the Senate’s June 4 vote to confirm Bowman as vice chair, she took a Fresh Look at Supervision and Regulation: “I welcome the opportunity to consider a broader range of perspectives as we look to the future of capital framework reform.” She teased a conference scheduled for July 22, where leverage ratios and stress testing will be discussed along with “potential reforms to the G-SIB [global systemically important bank] surcharge and the Basel III capital requirements.”
Yet another speech, Unintended Policy Shifts and Unexpected Consequences, came on June 23, when the banking agencies were poised to propose changes to the enhanced supplementary leverage ratio (eSLR). Bowman called that “a first step toward what I view as long overdue follow-up to review and reform what have become distorted capital requirements.”
She went on to suggest “a broader set of reforms [that] could include amending not only the leverage capital ratio, but also G-SIB surcharge requirements. We should also reconsider capital requirements for a wider range of banks, including the SLR’s application to banks with more than $250 billion in assets, tier 1 leverage requirements, and the calibration of the community bank leverage ratio . . . We need to think about regulatory policies in a dynamic way based on the evolution in the banking and financial systems, and the broader economy.”
Bowman is in a position to turn up the volume on potential reforms as the two other federal banking agencies await confirmation of permanent chiefs. But the interim leaders, Vice Chair Travis Hill at the Federal Deposit Insurance Corp. and Acting Comptroller Rodney Hood at the Office of the Comptroller of the Currency, who reports to Deputy Treasury Secretary Faulkender, have not been mere caretakers.
Hood said on June 3 that in addition to withdrawing certain climate-related principles and no longer examining for reputation risk, “we are also focused on modernizing capital standards. While U.S. banks remain the gold standard of international finance, that doesn’t mean we must gold-plate our capital requirements. I’ve engaged extensively with my U.S. and global counterparts to advocate for capital levels that are strong, but appropriate – not excessive.
Acting Comptroller Hood: “Engaged extensively” with counterparts.
“At a recent meeting in Basel, I conveyed that sentiment directly. I was heartened to see consensus from the international community that the U.S. proposal had gone beyond what was necessary. As we continue interagency deliberations, I will remain committed to a capital framework that supports resilience – but does not constrain growth.”
Elaborating in an interview with Politico, Hood said it was clear to the Basel cohort “that the Americans are going to be recalibrating. We’re not retreating . . . I think there were those that thought we were going to retreat. But we are going to recalibrate and have a capital plan that does not eliminate the competitive position of our American banks.” The aim is “capital neutrality” and avoiding gold-plating.
On June 27, the FDIC’s Hill weighed in on replacing “the existing gold-plated eSLR standards for U.S. G-SIBs . . . The largest U.S. banking organizations, including their bank and dealer subsidiaries, are critical to financial market functioning and economic growth. I support the proposal, which will provide more capacity for institutions to engage in low-risk activities such as U.S. Treasury market intermediation.
“At the same time, I continue to believe that strong capital standards are critical to ensuring a resilient banking system, in which banks can withstand unexpected shocks and continue to serve their customers and communities. The proposal would, at the holding company level, reduce aggregate required tier 1 capital by approximately $13 billion, a reduction of approximately 1.4%.”
“This proposal will not only reduce burden,” said Acting Comptroller Hood, “but will also help promote the smooth functioning of U.S. Treasury markets. The proposed modifications would help ensure that the enhanced supplementary leverage ratio standards generally serve as a backstop to risk-based capital requirements rather than as a regularly binding constraint.”
“Backstop rather than binding constraint” has become a mantra.
Changing times and circumstances called for revisiting the SLR and effects of the eSLR on the biggest banks, Fed Chair Jerome Powell said in a statement for the board’s June 25 open meeting: “Because banks play an essential intermediation role in the Treasury market, we want to ensure that the leverage ratio does not become regularly binding and discourage banks from participating in low-risk activities, such as Treasury market intermediation.”
Two of the seven Fed governors, Michael Barr and Adriana Kugler, voted against the proposal, viewing it as taking capital relief too far.
Senator Elizabeth Warren of Massachusetts, the Senate Banking Committee’s ranking Democratic member, argued in a letter to Bowman, Hill and Hood that “concerns over a strong eSLR are more related to big banks’ ability to make payouts to shareholders and executives than their ability to act as a source of strength to the economy during periods of stress. If the banking agencies gut this requirement, the big banks will load up on more debt, pay out more money to shareholders and executives, and put the entire economy at risk of another financial crash.”
The table above, from the Bank Policy Institute, shows a risk-based capital requirement of $965.4 billion and leverage-based capital requirement of $922.9 billion for the eight U.S. G-SIBs based on 2025-Q1 data. Because banks must meet the higher of the two (their binding maximum), their total capital requirements are $972.5 billion. Under the new eSLR proposal (table below), the eSLR requirement would decline to $713.4 billion. With banks having to meet the higher of the two requirements, and as the proposal purposely provides relief such that risk-based ratios are binding, the new capital requirement would be $965.4 billion, 0.74% less.
In line with Vice Chair Bowman’s characterization, Bank Policy Institute president and CEO Greg Baer described the SLR proposal as “a first step toward a more rational capital framework that enables banks to perform their core purpose of intermediating markets and supporting economic growth. We are hopeful that this proposal begins the process of returning the SLR to its intended purpose: a backstop, not a binding constraint . . .
“However, while this recalibration is a positive step, maximizing banks’ financing capacity requires comprehensive reform, and comprehensive reform needs further action.”
Kenneth E. Bentsen Jr., president and CEO of SIFMA, voiced approval of the regulators’ proposal, which is open for public comment until August 26. He pointed out: “Leverage ratios, being non-risk-sensitive, disincentivize large banking organizations from holding and intermediating safe assets, such as central bank reserves and U.S. Treasury securities. With U.S. Treasury issuance set to grow rapidly, and with volatility in the market top of mind, lowering the supplementary leverage ratio buffer requirement does not address the disincentives that large banking organizations face.
“Thus, we encourage the agencies to exempt Treasuries and central bank deposits from leverage ratio calculations going forward. This will ensure banks can effectively intermediate the Treasury market and have greater resources to support U.S. economic growth.”
Both risk-based capital and the SLR came up in late June when Jerome Powell faced Senate and House committees for the semiannual check-ins known as Humphrey-Hawkins hearings.
“We’ve always at the Fed wanted the risk-based capital to be the binding one, and the leverage ratio to be the backstop,” the Fed chair explained to Senate Banking Committee member Angela Alsobrooks, Democrat of Maryland, on June 25. The proposal that the Board of Governors voted on later that day is meant to “restore the backstop characteristics of the leverage ratio . . . It will not in any way diminish the safety and soundness of the financial system and will allow for banks to undertake lower risk.”
When Senator Tim Scott, Republican of South Carolina and Banking Committee chairman, asked if he agreed that “adjusting the SLR would free up capital for banks to invest more in Treasury markets and other low-risk assets that would be beneficial to families and businesses across the country,” Powell said that he did.
When a question was posed about Basel III “hopefully being reintroduced and not just recalibrated,” Powell responded: “We very much look forward to working with our colleagues at the OCC and the FDIC on Basel III endgame. And I would agree we’re going to take a fresh start at that.”
A House Financial Services Committee member, Representative Tim Moore, Republican of North Carolina, cited objections to the U.S. being “a follower instead of a leader in the international arena.” He asked Powell if he agreed that the U.S. “should only implement international standards in a way that is consistent with our own domestic legal and regulatory scheme.”
Powell’s reply: “I do.”