Kate Wellman and John Stoker of Moore & Van Allen's Financial Regulatory Advice & Response team wrote a follow-up to their recent Law360 article titled, "Federal Reserve Board Hosts Capital Conference to Further Capital Reform Efforts."
On July 22, 2025, the Board of Governors of the Federal Reserve System (Board) hosted a first-of-its-kind industry conference designed to solicit public input on reform of the U.S. capital framework for financial institutions. The conference featured panels that focused on topics of leverage ratios, stress testing, the surcharge applicable to Global Systemically Important Financial Institutions (GSIBs), and U.S. implementation of Basel III, which is the final stage of reforms under the global capital framework developed by the Basel Committee on Banking Supervision. The conference followed notices of proposed rulemaking (NPRs) by the Board and other banking regulators related to the enhanced supplementary leverage ratio (eSLR) and stress testing, which we detailed in a previous post.
A broad range of industry participants spoke on the panels, including representatives from banks' accounting and treasury departments, lawyers and consultants, law professors, and regulators. Our key takeaways from the conference are below.
Consensus on Overly Complex and Outdated Nature of Capital Rules
Treasury Secretary Scott Bessent set the stage in a speech the day before the conference by describing the capital rules as "regulation by reflex" that were imposed piecemeal in response to crises. This theme was repeated throughout the conference. Panelists noted that the rules are not only difficult for bank investors to understand, but also appear stuck in a mindset of the 2008 financial crisis without reflecting the significant additional measures to which the largest banks are subject today, including total loss-absorbing capacity (TLAC), liquidity management, and resolution planning requirements. The discussion of the complexity and "piling on" nature of the requirements led to participants raising concerns with the cumulative unintended consequences of these requirements, including reduction in lending activities and limits on available credit, as well as the redirection of activity to non-regulated entities.
Differing Viewpoints on Capital Reforms
No clear solutions emerged from the conference, which was consistent with the diversity of interests represented and the breadth and complexity of topics covered. In each panel, the panelists debated the relative merits and potential drawbacks of each alternative. Audience members then challenged assumptions and raised additional considerations during question-and-answer sessions. For example, during the GSIB surcharge discussion, one potential solution offered to address the higher, more volatile surcharge that has resulted from using the U.S-specific "Method 2" surcharge was instead only to use the simpler, more straightforward "Method 1" international standard. However, some panelists noted that the considerations that led the Board to adopt Method 2 – a desire to have the surcharge reflect economic growth and to avoid volatility – are still present. They instead suggested targeted fixes to Method 2 – for example, establishing a cadence for updating the fixed coefficients that are applied to calculate Method 2.
Promotion of Benefits of International Consistency
Panelists touted the benefits of international consistency throughout the conference. The identified benefits included (i) the economies of scale and scope large banks can develop when they are subject to the same standards globally and (ii) the increased competition that results from leveling the playing field among banks in different jurisdictions. The panels on implementation of Basel III and stress testing included representatives from the Bank of England to provide perspective on how their jurisdiction was handling these issues. Several panelists expressed that the flaws they perceived in the original July 2023 NPR addressing implementation of Basel III were based on components the U.S. added to the international standard. This included double counting of certain items, including items that would be capitalized both under the Basel III proposal and the stress capital buffer that is calculated from stress testing results.
Views that Proposed Rules May Not Go Far Enough
Panelists on the leverage ratio panel were generally supportive of the recent eSLR NPR. Some advocated for the proposed rule to go farther to support Treasury market intermediation by banks. The proposed solutions included adopting the "narrow exclusion approach," on which the Board requested comment in the NPR, to exempt Treasury securities reported as trading assets on a banking organization's balance sheet and held at a broker-dealer subsidiary. While the Board still currently retains discretion to intervene on an emergency basis to exempt Treasury securities, as it did at the onset of the COVID pandemic, some panelists noted the potential negative impact of a lack of certainty, including because banks may manage their balance sheets now assuming emergency measures would not be taken in times of stress. However, potential consequences of adopting the exclusion were also raised. These included other governments seeking to follow suit by exempting their own government securities, which could have a negative effect on financial stability globally.
For stress testing, panelists across the panels expressed different viewpoints, including that the scenarios and "shocks" applied as part of the stress tests are still based on the 2008 financial crisis and have not been updated to account for all of the regulatory reform measures that have been completed since that time. Participants raised potential issues with the Board's proposal to disclose stress tests and put them out for public comment in advance of their use, with some panelists noting this could cause the models to become static and not to reflect a changing environment. Some panelists also favored averaging more than one scenario in a given year, rather than averaging stress testing results over multiple years, as is proposed under the April 2025 stress testing NPR, to more accurately capture risks. This could be accomplished through a system similar to what is used in England that considers both the supervisory test and institution-conducted tests in determining the buffer. The panelists advocating this approach suggested such a system could put less pressure on performance of the supervisory models.
Discussion of stress testing at the conference is part of a broader debate that has been playing out in the courts. Certain bank and business trade associations have pending litigation against the Board challenging the opaqueness of the Board's approach to stress testing and absence of an opportunity for public review and comment. The Board and the plaintiffs had previously agreed to a stay of the litigation that was originally scheduled to expire August 1. Pursuant to a joint request, the litigation stay has been extended to October 15, 2025. It is expected that the Board will propose additional rules before expiration of the new stay that will include enhanced disclosure of information regarding its stress test models and will solicit public comment on the models and scenario design. Since the Board included the topics of the two recent capital-related NPRs as separate panels in the conference, we expect the feedback from these panels may influence where the Board ultimately lands with the rules.
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