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What Is the Basel III Endgame, and Why Are Banks So Upset About It?

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An unlikely coalition of banks, community groups and racial justice advocates is urging federal regulators to rethink the plan they proposed in July to update rules governing how U.S. banks protect themselves against potential losses.

Regulators are calling for an increase in the amount of capital — cash-like assets — that banks have to hold to tide them over in an emergency to avoid needing a taxpayer-funded bailout like the one in the 2008 financial crisis. The demise of three midsize banks and a fourth smaller one last year, under pressure from rising interest rates and losses from cryptocurrency businesses, bolstered regulators’ views that additional capital is necessary. Financial regulators around the world, including in the Europe Union and Britain, are adopting similar standards.

Banks have long complained that holding too much capital forces them to be less competitive and restrict lending, which could hurt economic growth. What’s interesting about the latest proposal is that groups that don’t traditionally align themselves with banks are joining in the criticism. They include pension funds, green energy groups and others worried about the economic ramifications.

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“This is the biblical dynamic: Capital goes up, banks yell,” said Isaac Boltansky, an analyst at the brokerage firm BTIG. “But this time is a little bit different.”

On Tuesday, the last day of the monthslong period when members of the public could provide feedback to regulators about the proposal, bank lobbyists made a fresh push to get it scrapped. While there’s no indication that regulators will fully withdraw the proposal, the barrage of complaints about it is likely to force them to make big changes before it becomes final.

The Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency — the agencies that will determine the final rules — want to synchronize U.S. standards with those developed by the international Basel Committee on Banking Supervision. The committee doesn’t have direct regulatory authority, but regulators follow its guidelines in the hope that agreement about how much capital that big banks around the world should hold will help avert a crisis.

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The new capital rules would apply only to institutions with $100 billion or more in assets — including 37 holding companies for U.S. and foreign banks. Some of the rules are even more narrowly tailored to institutions so big that regulators consider them systemically important. Regulators and financial industry participants call the rules “Basel III endgame” because they are the U.S. government’s attempt to carry out a 2017 proposal by the Basel committee called Basel III.

If some version of the proposed U.S. plan is completed this year, the rules will take effect in July 2025 and be fully operational by 2028.

Banks have long griped about having to hold more capital to offset the risks posed by loans, trading operations and other day-to-day activities. They also oppose the latest 1,087-page plan. The industry’s efforts to scuttle the proposal have included websites such as and, a constant stream of research papers detailing the plan’s failings, influence campaigns on Capitol Hill, and even threats to sue the regulators.

On Tuesday, two lobbying groups, the American Bankers Association and the Bank Policy Institute, filed a comment letter, more than 300 pages long, enumerating the ways the proposed rules could push lending activity into the shadow banking industry, reduce market liquidity and cause “a significant, permanent reduction in G.D.P. and employment.”

Banks are particularly peeved by a proposal for guarding against risks posed by mortgage lending. The option — it is one of several laid out in the plan but has attracted the heaviest focus — would force them to pay more attention to the characteristics of each loan and in some cases assign the loans a much higher risk score than they currently do.

They say the rule could cause them to stop lending to borrowers they don’t consider safe enough. That could hurt first-time home buyers and those without steady banking relationships, including Black Americans, who regularly face racism from the banking business.

Banks also say the rules would make it tough for private companies to get loans by forcing banks to consider them riskier borrowers than public companies, which have to disclose more financial information. Banks say many private companies are just as safe as some public companies, or safer, even if they don’t have to meet the same financial reporting requirements.

Some liberal Democrats in Congress and nonprofits devoted to closing the racial wealth gap are worried about the plan’s treatment of mortgages. Others say parts of the proposal could hurt renewable energy development by taking away tax benefits for financing green energy projects.

The National Community Reinvestment Coalition, which pushes banks to do more business in largely Black and Hispanic neighborhoods where banks often have scant presence, warned that parts of the proposal’s “overly aggressive capital requirements are likely to make mortgages significantly more expensive for the lower-wealth populations.”

Pension funds, which would count as private companies rather than public ones under parts of the proposal, say it would force banks to unfairly treat them as riskier financial market participants than they really are.

There is no question that the regulators’ final proposal, if they issue one, will be different from the July proposal.

“We want to make sure that the rule supports a vibrant economy, that supports low- and moderate-income communities, that it gets the calibration right on things like mortgages,” the Fed’s vice chair for supervision, Michael S. Barr, said on Jan. 9 during a finance industry event in Washington. “The public comment that we’re getting on this is really critical for us getting it. We take it very, very seriously.”

Most observers think that criticism of the plan will force regulators to make substantial changes. But not everyone agrees that a future under the new rules is as clearly grim. Americans for Financial Reform, a progressive policy group, argued in its comment letter, which praised the proposal overall, that research showed that banks lent more — not less — when they had more capital in reserve.

Still, “there are more complaints about this from more groups than there usually are,” said Ian Katz, an analyst at Capital Alpha covering bank regulation.

That could mean the banks are really onto something this time, even though their warnings of economic pain sound familiar. But, Mr. Katz said, the future is less predictable than the banks are suggesting. While some may pull back from lending under tougher capital rules, others may see an opportunity to increase their market share in the absence of erstwhile competitors.

“We don’t know how individual companies would respond to this as a final rule,” he said.

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