Capital Recalibration: Overview Of The 2026 Basel III, Revised Standardized Approach, And GSIB Surcharge Proposals

In March 2026, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (the “Federal Reserve”), and the Federal Deposit Insurance Corporation (FDIC, and together with the OCC and Federal Reserve, the “Agencies”) released a set of proposals that would significantly recalibrate U.S. bank capital requirements across banking organizations of all sizes, including:

• a proposed rule to implement the final components of the international Basel III standards for the largest banking organizations by replacing the current advanced approaches with a revised, consolidated capital framework (the “Basel III Proposal”);
• a proposal to revise and simplify the standardized approach for calculating capital applicable to organizations not subject to the Basel III Proposal (the “ Revised Standardized Approach Proposal”), and
• a proposal, by the Federal Reserve, to revise the methodology used to calculate capital surcharges applicable only to designated global systemically important bank holding companies (GSIBs) (the “GSIB Surcharge Proposal”).

Taken together, these proposals mark a significant shift from the Agencies’ 2023 capital proposals, which would have substantially increased capital requirements for a broad range of banking organizations. Following significant industry opposition, the Agencies paused the 2023 effort and developed a revised approach intended to enhance risk sensitivity, reduce unnecessary complexity, and produce a more moderate aggregate capital impact. The March 2026 proposals are estimated, on average and with organization‑level variation, to reduce Common Equity Tier 1 (CET1) capital requirements, which would be expected to increase banks’ lending capacity. The proposals also reduce instances of U.S. gold‑plating of Basel international standards, improving the competitive position of U.S. banking organizations relative to their foreign peers.

This article covers the following topics in the sections that follow:

• the Basel III Proposal,
• treatment of credit risk exposures under both the Basel III and the Revised Standardized Approach Proposals, and
• the GSIB Surcharge Proposal.

Proposed Revisions to the Capital Framework for Large Banking Organizations and those with Significant Trading Activity

Currently, GSIBs (Category I organizations) and certain other large and internationally active organizations (Category II organizations) are subject to two sets of risk-based capital ratio requirements. These organizations must calculate capital under both the standardized approach, which is applicable to banking organizations generally, and the advanced approaches, which is based on an internal models framework, and then must use the more binding output of the two.

Under the Basel III Proposal, Category I and II organizations would instead be subject to a single, consolidated risk-based capital framework referred to as the Expanded Risk-Based Approach (ERBA). In addition, the proposal would allow organizations otherwise subject to the standardized approach to opt-in to using the ERBA, which the Agencies noted may be preferrable for some organizations based on their business models and risk management systems. Upon opt-in, the organization would become subject to the regulatory definitions for capital that apply to Category I and II organizations and a five-year transition period to include most elements of accumulated other comprehensive income (AOCI) in regulatory capital.

The ERBA includes a unified framework for calculating capital requirements for credit, equity, operational, and market risks. The Agencies developed the ERBA by using the standardized approach as a foundation, retaining elements of its capital treatment where the Agencies determined it was sufficiently risk sensitive but providing more granular adjustments in other areas where appropriate to better reflect risk for the largest organizations.

The Agencies estimate the ERBA would increase CET 1 capital requirements at the holding company level of Category I and II organizations by approximately 1.2% while decreasing the CET I capital requirements for Category I and II subsidiary depository institutions by approximately 5.1%. When combined with the GSIB Surcharge Proposal and 2025 proposed stress testing changes, the Agencies expect a 5.0% net decline in CET I capital requirements for Category I and II holding companies. Overall, the Agencies concluded that the potential effects of the proposal were justified by the more risk sensitive approach that would provide for more consistent requirements across organizations.

Credit Risk Framework

The ERBA’s credit risk framework generally mirrors the framework under the standardized approach, requiring banking organizations to determine an exposure amount and apply risk weightings based on exposure type, counterparty, and applicable risk drivers, with recognition of credit risk mitigants where permitted. The Agencies propose to make ERBA more risk-sensitive than the current U.S. standardized approach by incorporating additional risk factors like loan-to-value (LTV) ratios for real estate exposures, repayment history for retail exposures, and assessed creditworthiness for corporate exposures. We highlight key elements of the credit risk framework under the ERBA and standardized approaches in more detail below.

Equity Risk Framework

The ERBA’s treatment of equity exposures generally depends on whether the organization would be subject to the proposed market risk framework and the type of security. For organizations subject to the market risk framework, publicly traded securities and certain investment funds exposures would generally be governed by the market risk capital requirements while other equity positions would be subject to the equity risk framework. For organizations not subject to the market risk framework, all equity exposures would be subject to the proposed equity framework, which the Agencies have characterized as largely consistent with the current standardized approach but with modifications to simplify the treatment of conditional commitments to acquire equity.

Operational Risk Component

Currently, Category I and II organizations calculate operational risk-weighted assets under the advanced approaches framework, which historically relied on the advanced measurement approaches (AMA) using internal models. The ERBA eliminates the use of internal models for the operational risk component and replaces it with a standardized approach for the risks covered by AMA. Under the proposal, operational risk-weighted assets would be calculated against the volume of the organization’s business activities (the “business indicator”). The Agencies have used level of business activity as a proxy for increased organizational complexity and potential for operational risks. The business indicator, calculated on a 3-year rolling average to reduce volatility, consists of two components – one to capture its interest business-related activities (such as lending and investment activities) and another to capture noninterest business-related activities (such as trading or other fee-based activities). The proposal retains requirements from the advanced approaches that organizations subject to the ERBA must have an operational risk management function that is independent of business line management and that is responsible for the design, implementation and oversight of operational risk management, including collection and reporting of operational loss data.

The Agencies’ recalibration of the operational risk component of regulatory capital reflects, in part, industry feedback that the 2023 proposals would have duplicated the capture of forward-looking operational losses that were already reflected in stress testing and the stress capital buffer. In addition, and while the Agencies generally declined to assess differences in operational risk posed across various lines of business, the Agencies did recognize arguments regarding the lower operational risk posed by investment management services, investment services, and non-lending treasury services. After analyzing risk data reported by Category I and II bank holding companies that reflected lower historical operational losses resulting from these activities, the Agencies proposed to apply a 70% reduction factor to the noninterest income and expense associated with these activities for purposes of the operational risk calculation. In addition, the Agencies did not incorporate Basel’s optional internal loss multiplier (ILM), which uses the organization’s historical internal operational losses. The ILM was incorporated into the 2023 capital proposal’s operational risk framework, but its inclusion was criticized by the industry as not reliable for predicting future losses. The Agencies requested comment on whether the ILM should be incorporated into the final framework.

Market Risk Framework

The proposed market risk framework would apply to all Category I and II organizations and to other organizations with significant trading activity and captures risks from general market movements, counterparty or issuer defaults, complex instruments not mapped to standard risk factors, and non-modellable risk factors. Under the proposal, organizations would calculate market risk capital for their trading book under a revised standardized approach and, subject to supervisory approval, an internal models approach applicable at a trading desk level. For a trading desk to use an internal model, the proposal requires back-testing and a profit and loss attribution test.

ERBA’s and the Revised Standardized Approach’s Treatment of Credit Risk Exposures

Both the ERBA and the revised standardized approach for credit risk would substantially revise the capital treatment for residential real estate, commercial real estate, and off‑balance‑sheet exposures, and credit risk mitigation techniques, with the stated goal of improving risk sensitivity, reducing unnecessary complexity, and aligning U.S. requirements more closely with the Basel III standards. Most notably, the proposals substantially revise the capital treatment of residential mortgages and mortgage servicing assets (MSAs) by eliminating punitive deductions, incorporating LTV ratios and cash‑flow dependency into risk weights, and removing elements of U.S. “gold‑plating” that may have discouraged bank participation in mortgage lending and servicing in favor of nonbanks. Beyond mortgages, the proposals also modernize capital treatment for off‑balance‑sheet commitments, simplify and, in some cases, increase credit conversion factors, and deliver significant relief under both the simple and collateral haircut approaches for recognizing financial collateral and funded credit protection.

Treatment of Residential Mortgages

The proposals make three key changes with respect to certain residential mortgages:

• removing the requirement to deduct MSAs exceeding 25% of a banking organization’s common equity tier 1 capital and assigning all MSAs a 250% risk weight;
• incorporating consideration of LTV ratios into applicable risk weights; and
• varying the risk weight based on whether repayment is dependent on cash flows generated by the underlying property.

These changes reduce capital disincentives for banks to participate in mortgage origination, lending, and servicing businesses. Punitive capital treatment of these assets is widely considered to be one reason why these activities are currently primarily done by non-banks. Additionally, the changes would increase the risk sensitivity of capital treatment of mortgage assets, affording lower capital treatment to assets generally considered to be less risky. The changes are more consistent with the international Basel III standards and remove the “gold-plating” currently associated with the U.S. standard.

Further detail on these proposals is provided below.

• Mortgage Servicing Assets: MSAs refer to the servicing obligation that remains after the mortgage loan itself is sold to a third party. Banks may own MSAs associated with loans they originate, or they may purchase them from other banks in the secondary market. MSAs can be difficult to value and carry some uncertainty because they may lose value in an environment where there are high levels of refinancings or defaults. However, they may also be helpful in hedging interest rate risk created by other assets and in making customer relationships “stickier” so that customers have greater loyalty to a bank and reasons to use the bank’s other products and services.

The proposed 250% uniform risk weight mirrors the risk weight currently applicable to MSAs below the deduction thresholds. The Agencies requested comment on the appropriate risk weight.

• Loan-to-Value Ratios: Generally, under both the ERBA and the revised standardized approach, risk weights would incorporate LTV ratios for first-lien mortgage exposures that are secured by certain owner-occupied or rented residential property. The Agencies described LTV ratios as an appropriate reflection of risk because, generally, default risk goes down as a borrower’s equity in the property increases. For qualifying mortgage exposures, a lower LTV ratio would equate to a lower risk weight. Residential mortgage exposures not meeting these requirements – for example, a junior lien home equity line of credit or other second mortgages – would continue to receive a flat 100% risk weight.

The calculation of the LTV ratio under the proposal would reflect the current amortized balance of the loan in the numerator of the ratio. This means the risk weight assigned to a particular loan would decrease over time as it is paid off. The denominator would reflect the value of the property at origination plus any increased estimated value from improvements made through the extension and the fair value of readily marketable or other acceptable collateral securing it. This would provide certainty and predictability to the calculation, although the proposal would retain some discretion through exceptions where the banking organization’s primary Federal supervisor or an extraordinary event requires an adjustment downward, or modifications to the property result in an increase to value supported by a new appraisal or independent valuation.

Proposed risk weights for qualifying residential mortgage exposures not dependent on cash flows would range from 20% to 70% under the ERBA and from 25% to 75% under the standardized approach. Incorporation of LTV ratios is a significant change from the current approach under the capital rules, which apply a uniform 50% risk weight to residential mortgages. The proposed risk weights under the ERBA align to Basel III and address criticism of the 2023 proposal, which had sought to add 20% on top of the Basel III risk segments.

• Effect of Underlying Property’s Cash Flows on Repayment: Residential mortgages where repayment is dependent on cash flows generated by the underlying property – such as rental payments – would receive a higher risk weight. This would reflect the risk of nonpayment resulting from decreased cash flows and the influence of other factors on ability to pay such as local market conditions. Residential mortgage exposures secured by the borrower’s principal residence would not be considered dependent on cash flows, but vacation or other second homes would be unless the banking organization can show it relied only on the borrower’s personal income and resources in making the loan.

Proposed risk weights for qualifying residential mortgage exposures dependent on cash flows would range from 30% to 105% under the ERBA and from 35% to 110% under the standardized approach. The Agencies estimate risk weights will decrease for mortgages where repayment is not dependent on cash flows and the LTV ratio is under 90%. However, the risk weights will not increase above the capped levels even for loans with very high LTV ratios. This impact could be further mitigated for FHA- and VA-guaranteed loans through recognition of the government guarantee under the standardized approach, which can result in effective risk weights of around 20%.

Treatment of Other Real Estate Exposures

Under the ERBA, LTV ratios and dependency on cash flows would also influence the calculation of risk weights for certain lower-risk commercial real estate exposures – specifically, those that are primarily secured by fully completed real estate, not modified or restructured, and made in accordance with prudent underwriting standards, and in which the banking organization holds a first priority security interest legally enforceable in all relevant jurisdictions. Under the standardized approach, most commercial real estate loans would have a 95% uniform risk weight, a decrease from the current 100% risk weight. The Agencies note they calculated that 95% risk weight by extrapolating how the changes under the ERBA would impact the amount of capital required to be held by Category III and IV institutions were they to adopt the ERBA. Notably, the Agencies retained the standardized 150% risk-weighting for high volatility commercial real estate exposures.

Treatment of Off-Balance Sheet Exposures

Compared to the proposals’ approach on mortgages, the proposed changes to off-balance sheet exposures are less sweeping and increase capital in some cases. The Agencies declined to exclude credit arrangements that are unconditionally cancellable from the definition of a commitment. Instead, the proposals would update that definition to expressly encompass agreements to the terms of a future extension of credit that a banking organization may unconditionally cancel or otherwise not perform.

The ERBA proposal would adopt the standardized approach related to off-balance sheet exposures. This involves multiplying the off-balance sheet component – generally, the contractual amount – by a credit conversion factor (CCF) that reflects the likelihood of the off-balance sheet item moving on-balance sheet and applying the applicable risk weight to the resulting amount. The proposals would make three changes related to this calculation:

• Both the ERBA and revised standardized approach would eliminate distinctions in risk weights based on the maturity of the unused portion of a commitment that is not unconditionally cancelable – currently, a 20% CCF for original maturities of one year or less and 50% for one year or more. The proposal would simplify capital treatment of these commitments by setting the CCF uniformly at 40%.
• The ERBA would also increase the CCF applicable to the unused portion of a commitment that is unconditionally cancellable from 0% to 10%. The revised standardized approach would leave the credit conversion factor at 0% for risk-based capital purposes.
• Both the ERBA and revised standardized approach would use the largest drawn amount over the prior 24 months as a proxy for the undrawn exposure amount, when determining capital treatment for commitments with no pre-set limits such as charge cards. The Agencies describe the largest drawn amount as an appropriate proxy because it suggests how much credit the banking organization would be willing to extend. The ERBA would limit use of this proxy to retail exposures, while the standardized approach would include all exposures.

Treatment of Collateralized Exposures under the Simple Approach

Both the ERBA and the revised standardized approach will have a beneficial impact on the ability of banking organizations to recognize the benefits of credit risk mitigants by addressing restrictive elements of the current capital rules related to the U.S. automatic stay and maturity and currency mismatches in financial collateral and by recognizing a new credit risk mitigant form – prepaid credit protection.

• Relief for Financial Collateral Subject to The U.S. Automatic Stay

Under the current rules, organizations are generally restricted from recognizing capital benefits for taking financial collateral¹ to secure non-derivative exposures unless the collateral would not be subject to the application of the automatic stay under the U.S. Bankruptcy Code. Specifically, financial collateral must be subject to a “collateral agreement”, which is defined to require the organization to have a perfected, first priority security interest in the collateral posted by the counterparty that provides the right to close-out the financial position and liquidate the collateral upon an event of default by the counterparty. A contract would not satisfy the requirement if the organization’s exercise of rights may be stayed or avoided under applicable law, except to the extent it may be stayed under specified receivership or resolution processes.

This default rule severely hampers the ability of organizations to benefit from a capital perspective for loan exposures to U.S. counterparties² where the automatic stay broadly applies in U.S. insolvency proceedings and halts creditor collection activity until lifted. Further, U.S. bankruptcy proceedings would likely apply to the U.S. assets of large multinational corporations, resulting in restrictions on the collateral treatment for non-U.S. counterparties as well depending on the location of the pledged assets. Organizations seeking capital relief may currently try to structure the transaction to either benefit from an exclusion from the automatic stay – for example, margin loans subject to Regulation T – or to have the collateral pledged by a counterparty that would not be subject to the U.S. Bankruptcy Code.

Neither ERBA nor the revised standardized approach retains the concept of a “collateral agreement”, and an organization only needs to have an enforceable right that it could exercise in a timely manner upon an event of default. The organization would still be required to have a perfected, first priority security interest in the collateral, and the rule proposal clarifies that the application of the automatic stay would not be a basis to preclude the organization from recognizing the credit risk mitigation benefits of the collateral provided that it has a “well-founded basis” for concluding that it will be able to exercise its rights in a timely manner.

• Maturity and Currency Mismatch Adjustment

Under the simple approach in the current capital rules, organizations are not eligible to recognize credit risk mitigation benefits for a transaction with financial collateral subject to a collateral agreement with a shorter tenor than the secured exposure or for collateral denominated in a different currency than the secured exposure. However, under both the ERBA and the revised standardized approach, organizations would be permitted to recognize the financial collateral subject to a maturity mismatch after adjusting the fair value of the collateral to reflect the mismatch. Similarly, the proposals would eliminate the requirement that financial collateral be denominated in the same currency as the secured exposure. The recognized fair value of the collateral in these cases would be adjusted by applying the 8% supervisory currency mismatch haircut, calibrated to a 10-business day holding period and daily revaluation. If the organization revalues collateral less frequently, the haircut is scaled up based on the number of days between revaluations, after applying any applicable maturity mismatch limitations.

• Prepaid Credit Protection

Both proposals also add a new form of potential credit risk mitigant available for all exposure types in the form of an “eligible prepaid credit protection arrangement” (PCPA), which is defined as a contractual agreement in which a “protection purchaser” (i.e., the banking organization) initially receives cash from a protection provider that the protection purchaser is required to repay on or before the transaction’s maturity date, less any losses that it incurs, due to a credit event on the protected exposure, such as borrower default. A common example of a PCPA would be the transfer of credit risk on an exposure to third party investors through a fully funded credit-linked note issued by a banking organization. The payment is not collateral – it is a liability held by the banking organization that reduces at the same time the organization incurs a loss on the protected exposure. A PCPA would be required to meet the following eligibility conditions:

• Be unconditional, written and legally valid and enforceable under applicable law;
• Cover all or a pro rata portion of all contractual payments due to be paid on the reference exposure(s);
• Provide that the amount and timing of payments due from the banking organization, as the protection purchaser, to the protection provider are incorporated into the arrangement and the arrangement only allows these terms to change in the event of a breach of the arrangement by the banking organization;
• Provide that entry of the protection provider into receivership, insolvency, liquidation, conservatorship, or similar proceeding does not change the amounts or timing of payments due by the banking organization under the arrangement;
• Upon a failure by the obligor on the one or more reference exposures to make a contractually required payment, or the occurrence of other credit events as described in the arrangement, allow the banking organization promptly to reduce the outstanding balance of the initial principal amount due to the protection provider by the loss of the organization on the reference exposures without input from the protection provider; and
• Not increase the banking organization’s cost of credit protection in response to deterioration in the credit quality of any of the reference exposures.

If the protection amount of an eligible PCPA is equal to or greater than the exposure amount of the reference exposure and any losses are shared pro rata between the banking organization and protection provider, the banking organization may assign the reference exposure a zero percent risk weight. Conversely, if the protection amount is less than the exposure amount of the reference exposure, the organization must treat the exposure as two separate exposures – one protected, one unprotected. The protected portion of the exposure would receive a zero percent risk weight. The unprotected portion of the exposure would receive its own calculated risk weighted asset amount using the risk weight assigned to the exposure and an exposure amount equal to the exposure amount of the original reference exposure minus the protection amount.

The same requirements noted above regarding maturity and currency mismatch adjustments would apply to PCPAs as well.

Treatment of Collateral Exposures under the Collateral Haircut Approach

Under both the ERBA and revised standardized approach, banking organizations may calculate the credit risk mitigation benefits of financial collateral securing exposures from repo-style transactions, eligible margin loans, collateralized derivative contracts³ and certain netting sets of such transactions using a collateral haircut approach. In adapting the collateral haircut approach for the ERBA, the Agencies noted that some modifications from the revised standardized approach were made for the ERBA approach and that the modifications were generally consistent with the Basel standards.

Both proposals use the same formula for calculating the exposure amount of a netting set of eligible instruments. In addition, both proposals eliminate the use of internal estimates for calculating haircuts. Instead, organizations must use market price volatility haircuts for the relevant collateral type and a standard 8% currency mismatch haircut (subject to certain adjustments). In terms of the market price haircuts, the Agencies sought to make the standard haircuts more risk sensitive by introducing additional granularity with respect to residual maturity and streamlining other aspects of the collateral haircut approach.

GSIB Surcharge Proposal

The GSIB surcharge is a risk-based buffer to reflect systemic importance that GSIBs must maintain to avoid restrictions on certain distributions and discretionary bonus payments. It is calculated as the higher of two methods:

• Method 1: Aligns to the Basel approach and is calculated based on weighted indicators across five categories associated with systemic importance – size, interconnectedness, suitability, complexity, and cross-jurisdictional activity. GSIBs calculate each indicator score by dividing their own measure by an aggregate global measure. Use of the global measure – representing indicators of all global GSIBs – controls for inflation and ensures the surcharge increases only if systemic risk increases.
• Method 2: Generally uses the same Method 1 indicators and categories but replaces substitutability with reliance on short-term wholesale funding. To determine the short-term wholesale funding score, a GSIB calculates the ratio of its average weighted short-term wholesale funding amount to its average risk-weighted assets over the last four quarters. Method 2 requires GSIBs to calculate scoring for the remaining four categories by multiplying each indicator value by fixed coefficients.

Method 2 – which is a U.S. creation – has been subject to multiple criticisms. First, the fixed coefficients have caused the surcharges to increase over time without a corresponding increase in systemic risk. Second, the denominator for the short-term wholesale funding indicator can result in changes in the score for that indicator despite short-term wholesale funding volume remaining the same. The GSIB Surcharge Proposal would address these criticisms by:

• Applying a one-time downward adjustment of the method 2 coefficients for the size, interconnectedness, complexity, and cross-jurisdictional activity categories by dividing the applicable Method 2 coefficients by 1.2;
• Replacing the ratio used to determine the short-term wholesale funding score with a fixed coefficient intended to calibrate that indicator to constitute approximately 20% of aggregate method 2 scores for U.S. GSIBs, which is consistent with the 2015 final rule; and
• Making annual adjustments to the coefficients for all five categories based on nominal U.S. gross domestic product, incorporating both real economic growth and inflation.

The GSIB Surcharge Proposal also includes changes proposed by the Federal Reserve in July 2023 that were never finalized:

• The Proposal would shift the reporting of certain systemic indicators used in GSIB method 1 and 2 score calculations to averages over a month or quarter rather than as of December 31 of the previous calendar year. This is intended to more accurately reflect risk profiles and remove incentives to manage the indicators to reduce the surcharge; and
• It would also replace the 100 basis points increments for systemic risk scores – each of which correspond to a specific surcharge – with 20 basis points. This is intended to make the surcharge more risk sensitive and reduce the “cliff effects” of significant changes in capital requirements when crossing from one band to another.

The GSIB Surcharge Proposal would also revise certain aspects of the systemic indicators and make corresponding updates to the instructions for the Systemic Risk Report Form (FR Y-15), which is the source of the inputs GSIBs use in calculating their surcharge.

Footnotes

1. The proposed rules maintain the current capital rule’s definition of financial collateral.

2. The restrictions may also apply to non-U.S. counterparties if they are similarly sube.t to a broad stay in insolvency proceedings as well. Certain U.S. persons are excluded from filing for insolvency protection under the U.S. Bankruptcy Code. For example, state regulated insurance companies and other financial institutions are subject to either state or federal receivership or resolution processes. Each would require a specific analysis of the relevant resolution/receivership procedures they would be subject to in order to ascertain whether a similar stay may apply.

3. If the banking organization has elected to use the standardized approach for counterparty credit risk (“SA-CCR”) for derivative contracts, it may not use the simple approach or collateral haircut approach to determine the exposure amount of the derivative contract or netting set, and may elect to use SA-CCR for repo-style transactions that are subject to a qualifying cross-product master netting agreement with derivative contracts, subject to certain conditions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.