The Basel III Endgame marks a pivotal regulatory shift for US banks, introducing more stringent capital requirements and a risk-sensitive framework that will reshape how banks manage capital and risk
The Basel III Endgame represents a significant regulatory overhaul impacting banks with $100 billion or more in assets. Released by the Federal Reserve, OCC, and FDIC in July 2023, it aligns with the Basel Committee on Banking Supervision’s standards, yet introduces unique requirements for U.S. banks. The proposal focuses on increasing risk sensitivity through the Expanded RiskBased Approach (ERBA), revising capital adequacy frameworks, and eliminating advanced internal models for calculating risk-weighted assets (RWA).
The Basel III Endgame marks a pivotal regulatory shift for US banks, introducing more stringent capital requirements and a risk-sensitive framework that will reshape how banks manage capital and risk
Key Changes in RWA
One of the core elements of the Basel III Endgame is the expanded risk-based approach (ERBA), replacing internal models for RWA calculation. This change will significantly affect capital ratios, especially for banks in Categories III and IV (those with $100 billion or more in assets). ERBA introduces new frameworks for credit risk, operational risk, market risk, and counterparty risk:
Credit Risk
The ERBA enhances granularity in risk-weighting for real estate, corporates, and bank exposures. It introduces lower risk weights for investment-grade corporates and more complex rules for real estate based on loan-to-value (LTV) ratios.
Operational Risk
The standardized measurement approach (SMA) will replace the advanced measurement approach (AMA), incorporating financial statement data and a 10-year loss history to improve risk sensitivity.
Market Risk
The Fundamental Review of the Trading Book (FRTB) introduces both standardized and internal model approaches, increasing RWAs across market risk and credit valuation adjustment (CVA).
Implementation Timeline
The Basel III Endgame sets a tight implementation schedule, with a go-live date of July 1, 2025. Banks will face a three-year transition period for implementing ERBA, during which they must phase in capital requirements, culminating in full compliance by July 2028.
The phase-in starts with an 80% multiplier in 2025, increasing by 5% each year. For Category III and IV banks, the removal of the Accumulated Other Comprehensive Income (AOCI) opt-out will further complicate capital ratio calculations, particularly as they transition to mark-to-market valuations on available-for-sale securities.
Data governance will be critical for banks during the transition, as the new rules demand more accurate and transparent reporting capabilities. Banks must assess data quality, accuracy, and completeness, and strengthen technology infrastructure to meet regulatory expectations for auditability and reporting accuracy.
Strategic Impacts on Banks
Capital Allocation Strategy
The ERBA could constrain capital allocation, leading banks to reassess their business mix and risk-return profiles. Operational risk and credit RWAs are expected to increase, forcing banks to recalibrate capital and return expectations for high-risk portfolios.
Governance and Data Management
Banks must enhance their governance structures to manage the complexity of the new rules. Strong program management will be required to ensure smooth implementation, with an emphasis on clear decision-making, escalation processes, and cross-departmental collaboration.
Technology Investments
As banks navigate Basel III Endgame, modernizing outdated technology is crucial. The reliance on legacy systems hinders their ability to comply with the new regulatory demands, leading to investments in automation and data analytics to support capital calculations, reporting, and risk management.
The Basel III Endgame will usher in a new era of regulatory oversight and capital management for U.S. banks, particularly those in Categories III and IV. With tighter timelines, increased data requirements, and a more risk-sensitive approach to capital adequacy, banks will need to invest in governance, technology, and strategy adjustments to remain compliant while ensuring operational efficiency.