Why Regulators Across Several Markets Are Easing the Banking Sector’s Capital Requirements

By Samantha Barnes, International Banker

Since the Global Financial Crisis (GFC), banking regulation has moved almost exclusively in one direction, as authorities around the world have imposed progressively higher capital requirements to strengthen lenders’ balance sheets and reduce systemic risk across the sector. As of last year, however, this regime of consistent tightening began to be somewhat relaxed, with regulators openly pushing for certain capital rules to be softened. While this sentiment does not represent a wholesale retreat from post-crisis oversight, it does suggest that banking resilience is increasingly weighed against economic imperatives amidst a financial system operating under decidedly different conditions from those that prevailed a decade ago.

It was through the Basel framework (a set of international banking regulations established by the Basel Committee on Banking Supervision [BCBS]) and other key legislative implementations that banks were required to hold large buffers of high-quality capital relative to their risk-weighted assets (RWAs), as regulators sought to embed more resilience directly into the financial system’s structure. Basel III, later augmented by the so-called Basel III Endgame (B3E), raised minimum risk-based capital ratios, while countercyclical buffers limited excessive credit growth.

Authorities also introduced increasingly granular risk-based rules to strengthen lenders’ leverage constraints, with specific leverage ratios functioning as non-risk-sensitive backstops against excessive bank borrowing. Additional requirements were further mandated for the largest institutions, with those classed as global systemically important banks (G-SIBs) required to hold extra capital and long-term total loss-absorbing capacity (TLAC).

Growing evidence suggests that policymakers view this regulatory-tightening cycle as coming to a close, with the United States, Europe and certain parts of Asia either easing or readjusting their capital rules.

More recently, growing evidence suggests that policymakers view this regulatory-tightening cycle as coming to a close, with the United States, Europe and certain parts of Asia either easing or readjusting their capital rules. Perhaps the most visible aspect of this cooling has been the acknowledgement that some regulatory ratios—especially leverage-based measures—are proving less effective as backstops and have instead become unnecessary restrictions on banks’ balance-sheet activities.

In June 2025, for instance, US regulators, including the Federal Reserve (the Fed), the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), proposed modifications to the enhanced supplementary leverage ratio (eSLR), which was originally introduced to provide a non-risk-based floor beneath risk-weighted capital requirements. In practice, however, the eSLR has increasingly prohibited activities involving even low-risk, low-return assets such as Treasury securities and repo (repurchase agreement) financing, thereby impairing market liquidity without necessarily improving bank solvency.

With this capital requirement potentially penalising the holdings of safe liquid assets, concerns have been growing that banks may scale back from crucial activities that invariably stabilise markets during periods of stress. “Over a decade ago, in the aftermath of the Global Financial Crisis, the agencies adopted the supplementary leverage ratio, or SLR, as a capital requirement that would be a backstop to risk-based requirements,” a June 25 “Statement on Enhanced Supplementary Leverage Ratio Proposal by Chair Jerome H. Powell” explained. “This was an important step in ensuring the resilience of the banking system.”

Fed Chair Powell also acknowledged, however, that conditions had changed since then. “When the Board originally approved the SLR—and the enhanced SLR, or eSLR, for our largest banks—we expected reserves in the banking system to substantially decline in the following years. Instead, we have seen bank reserves increase substantially. We also have seen Treasury holdings in the banking system climb precipitously.”

Powell confirmed that the “stark increase” in the amount of relatively safe and low-risk assets on bank balance sheets over the past decade “has resulted in the leverage ratio becoming more binding” and stated that the regulator should “reconsider” its original approach. The Fed’s vice chair for supervision, Michelle W. Bowman, meanwhile, argued that the existing eSLR calibration distorted capital allocation and that lowering it would allow it to function more meaningfully as a backstop, rather than a binding constraint.

“This change would enable the largest banks to allocate capital more efficiently within their organizations—including to their affiliated broker-dealers, which play a critical role in US capital markets and in Treasury market intermediation,” Bowman explained in a separate statement, adding that for G-SIB subsidiaries, the proposal replaced the 3-percent eSLR buffer with half of the G-SIB’s Method 1 risk-based capital surcharge (which calculates scores using five categories: size, interconnectedness, complexity, cross-jurisdictional activity and substitutability). “This change would enable the largest banks to allocate capital more efficiently within their organizations—including to their affiliated broker-dealers, which play a critical role in US capital markets and in Treasury market intermediation.”

Perhaps an even clearer signal of regulatory loosening for banks can be observed in the reconsideration of the Basel III Endgame. Initially agreed in 2017 to administer the final tightening of post-crisis reforms, the Endgame was expected to raise risk-weighted capital requirements for large banks substantially.

By mid-2025, however, US regulators began stepping back from their original proposals, with an August 1 Bloomberg report explaining that Bowman would lead the crafting of new measures to simplify how banks calculate their capital requirements. “Regulators are largely throwing out the original 1,087-page version proposed two years ago and will aim to unveil a new plan as soon as the first quarter of 2026,” the report noted.

Outside the United States, meanwhile, regulators have adopted a differentiated approach thus far. In the euro area, for example, the focus is on simplifying prudential requirements for smaller and less complex banks, mainly by reducing their compliance burdens without inadvertently weakening their core solvency standards. This implies a more selective adjustment, with the likes of the European Central Bank (ECB) and the European Commission (EC) having largely resisted broad-based capital reductions. Proposals thus far have focused on reducing reporting burdens, clarifying capital definitions and eliminating redundancies, rather than lowering core buffers.

More recently, however, banking groups have warned that relatively stricter capital frameworks risk placing European banks at a disadvantage compared with their US peers. The European Banking Federation (EBF) recently cautioned that complex capital requirements could weigh on lending and competitiveness if not aligned more closely with international standards. Whether authorities will heed such warnings remains to be seen; however, should regulatory regimes diverge further, balance-sheet-intensive activities risk migrating out of Europe and towards jurisdictions deemed to offer more flexibility.

European regulators nonetheless remain cautious for the time being, possibly reflecting the extended period during which the region’s banking sector experienced pronounced stress during and after the Global Financial Crisis (GFC). As such, concerns over bank profitability and overall financial stability may linger for some time yet.

As for the United Kingdom, regulators are adopting a more flexible implementation of Basel III standards, including adjustments to capital buffers and transitional arrangements. In December, for example, the Bank of England’s (BOE’s) Financial Policy Committee (FPC) reduced its Tier 1-capital benchmark for the UK banking system from 14 percent to 13 percent of risk-weighted assets, thereby setting a new Common Equity Tier 1 (CET1) ratio of around 11 percent. The move came after seven major UK lenders passed the FPC’s latest stress test, indicating strong capitalisation to withstand a sustained period of intense stress.

“The BoE’s FPC believes that the UK banking system is highly resilient to a protracted period of intense volatility after the seven major UK banks comfortably passed its most recent capital stress test. The regulator has reduced its Tier 1 capital benchmark for the UK banking system to 13 percent to reflect this resilience—a level materially below the Tier 1 resources in the system today,” according to S&P Global. “We expect banks’ capital requirements to taper to this level in the short-to-medium term, led by a reduction in the Pillar 2A buffer from January 2027, as per the BoE’s previous guidance, and followed by the finetuning of capital and leverage buffers. This represents an incremental rather than [a] material shift in the capital levels in the banking system.”

Ultimately, the softening of capital requirements across several major jurisdictions marks one of the most consequential regulatory developments of the last few months. While it does not signal a return to pre-crisis laxness, it does reflect a more adaptive philosophy, one that treats capital as a dynamic tool that can be adjusted more frequently, rather than a static target.

Indeed, the task facing regulators is not to weaken safeguards, but to ensure that prudential frameworks remain aligned with the realities of modern banking, market structure and economic conditions. If they succeed, capital rules may once again function as intended: supporting resilience without constraining the activities that keep the financial system working.