Banking Capital Dispute
Banking Groups Urge U.S. Regulators to Revise Basel Rules, Citing Treasury Market Risks
Key Points
ISDA chief Scott O’Malia said Treasury-market liquidity providers could face “higher capital charges” as the market moves to mandatory Treasury clearing “at the end of this year,” and urged regulators to ensure capital treatment of Treasury repos “reflects economic risk appropriately.”
In its prior softening of the broader framework, the Federal Reserve in March said its updated approach would lower capital requirements for the biggest U.S. lenders by 4.8%, setting the stage for industry to argue additional market-risk changes are still needed.
The lobbying is targeted at the Fed, FDIC, and the Office of the Comptroller of the Currency: the trade groups’ letter was explicitly addressed to those regulators, requesting revisions focused on Basel Endgame’s market-risk components.
Regulators are also considering additional Basel III revisions beyond trading-book capital—such as allowing midsize banks to use simpler capital-calculation methods and adjusting the G-SIB capital surcharge to align with GDP growth trends—alongside changes to G-SIB surcharges and stress tests.
One report put the scale of the concern at the $29 trillion U.S. Treasury market, describing it as the latest lobbying focus for the banking industry as Washington implements post-2008 global bank capital rules—and noting that, under pressure, regulators expect the rules to “no longer dramatically increase” overall capital and possibly reduce it.
Three of Wall Street's most powerful trade groups are pressing U.S. bank regulators to ease a key part of the "Basel Endgame" capital rules, warning that the $29 trillion Treasury market could face a dangerous liquidity crunch. The International Swaps and Derivatives Association, the Securities Industry and Financial Markets Association, and the Institute of International Finance sent a formal letter to the Fed, FDIC, and Office of the Comptroller of the Currency, according to Financial Times.
The groups say their estimates from large U.S. banks show trading-related capital requirements could surge between 30% and 89% under the current proposal. ISDA chief Scott O'Malia warned that liquidity providers in the Treasury market face "higher capital charges" just as the market moves to mandatory clearing "at the end of this year."
The Treasury Clearing Paradox Driving Industry Fears
At the heart of the dispute is a mismatch between two sets of rules. The SEC is requiring more Treasury trades — especially repos — to go through central clearinghouses. Central clearing reduces the net collateral banks need to hold. But the Basel market-risk rules would still charge capital based on gross activity, not net risk, according to Wall Street Journal.
In plain terms: banks would hold more capital against Treasury positions that are economically safer after clearing. O'Malia said the capital treatment of Treasury repos must "reflect economic risk appropriately." SIFMA CEO Kenneth Bentsen Jr. said the rules "would penalize the exact activities that provide liquidity" to the Treasury market, according to cryptobriefing.com.
Regulators Have Already Softened the Rules — But Not Enough
This is not the first time regulators have backed down. The original July 2023 proposal would have raised capital for the largest banks by about 16% to 19%. After a record 100,000-plus public comments and a multi-million dollar "Stop Basel Endgame" ad campaign, the Fed cut that figure roughly in half. In March 2025, the Fed went further, announcing an additional 4.8% reduction, according to Reuters.
Industry groups say those cuts addressed the wrong parts of the framework. The new letter zeroes in on the "Fundamental Review of the Trading Book" — the market-risk component. The groups argue this piece still does not match real-world risk and needs its own separate fix, according to valuethemarkets.com.
Banks Push for More Changes as Fed Consultation Wraps Up
Large U.S. banks are now making a final formal push to the Fed as the consultation period closes. Their top requests go beyond market risk. They include reducing the G-SIB surcharge — an extra capital buffer for the biggest banks — and tying it to GDP growth so banks aren't penalized simply because the economy expanded. Regulators are also weighing simpler capital methods for midsize banks, according to The State.
Goldman Sachs and Morgan Stanley analysts have warned that if the 30% to 89% trading-capital increase holds, banks will pass costs to clients through wider bid-ask spreads. That would make it more expensive for the U.S. government to borrow and for companies to hedge interest-rate risk, according to ca.finance.yahoo.com.
A Political Battle Over Who Pays for Bank Safety
The fight has split along partisan lines in Congress. House Democrats like Rep. Maxine Waters argue that strong capital rules are the last guardrail against another 2008-style collapse. She has called the industry pushback "scare tactics" designed to water down post-crisis protections. Advocacy group Better Markets points to the 2023 failures of Silicon Valley Bank and Signature Bank as proof the rules must stay tough.
Republicans and some centrist Democrats counter that U.S. banks are already far better capitalized than their European rivals. They warn that gold-plated rules push risk into the unregulated shadow-banking sector. The Fed has signaled the final rules should "no longer dramatically increase" overall capital and could even reduce it, according to Financial Times.
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