Regulators’ Capital Rewrite Would Scrap Banks’ Internal Credit Models
Three proposals issued in March would simplify risk-weighted assets for the largest banks. Finalization may not come until early 2027.
WASHINGTON — U.S. banking regulators are working to modernize the capital framework once known as the Basel III endgame, through three proposals issued on March 19, 2026. The comment period closed on June 18, and officials have signaled that finalization could run into early 2027.
The proposals apply on a mandatory basis to Category I and Category II banking organizations — the largest and most internationally active institutions — and on an optional basis to others. That optionality is itself a significant design choice, and one that mid-sized banks lobbied for.
Four changes account for most of the substance. The proposals would simplify how risk-weighted assets are calculated; remove the credit-risk internal models approach; replace existing operational risk methodologies with a standardized approach based on income and expenses; and make adjustments to the treatment of market risk and credit valuation adjustment, or CVA.
The elimination of internal credit-risk models is the structural change. Under the current regime, the largest banks estimate their own probabilities of default and loss severities, subject to supervisory review. Critics have long argued this produces incomparable capital ratios across institutions and gives banks a lever to optimize downward. Removing it trades that flexibility for comparability, and shifts the balance of judgment from the banks to the rulebook.
The standardized operational-risk approach carries a subtler consequence. Because it keys off income and expenses, it tends to assign more capital to fee-generating businesses — wealth management, payments, custody, advisory — regardless of whether those businesses have generated operational losses. Banks that spent the past decade pivoting toward fee income to reduce their reliance on the balance sheet may find that pivot penalized.
JPMorgan executives have warned that the final rules, taken together with changes to the surcharge on global systemically important banks, could squeeze lending to small businesses. The mechanism they describe is a familiar one in these debates: capital charges raise the cost of holding an exposure, and the exposures dropped first tend to be those with the thinnest margins, which in commercial lending often means the smallest borrowers.
Whether that materializes is contested, and the argument is difficult to settle in advance. What is not in dispute is the timeline. With finalization possibly slipping into early 2027 and multi-year phase-ins standard for rules of this scope, banks are being asked to make capital-allocation decisions now against a framework that will not be fully known for months.