Wall Street groups urge U.S. regulators to soften Basel Endgame rules

Wall Street’s biggest banking trade groups pressed U.S. regulators to soften the Basel Endgame overhaul, warning that the rule could make it more expensive for banks to hold trading assets and could strain liquidity in the Treasury market. The push landed on June 18, when the Institute of International Finance, the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association sent a joint comment letter to the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency in Washington.

Their letter focused on the market-risk, counterparty credit risk, credit valuation adjustment and securities financing transaction pieces of the proposal. The groups said they welcomed an extended SA-CCR approach that recognizes cross-product netting benefits between derivatives and securities financing transactions, a detail that could ease capital charges on positions banks use to finance and hedge large books of securities.

The dispute is part of a broader rewrite of the U.S. Basel III Endgame plan. On March 19, the banking agencies issued a revised reproposal that legal and industry summaries say would deliver about $87.7 billion in system-wide common equity tier 1 capital relief compared with the earlier draft. The original notice of proposed rulemaking came on July 27, 2023, when the OCC, Federal Reserve and FDIC sought to substantially revise capital requirements for large banking organizations with total assets of $100 billion or more and firms with significant trading activity.

That earlier proposal followed the banking turmoil of March 2023 and was framed by the Fed as the final set of Basel III components. Regulators wanted banks to hold more capital so the system could absorb losses more easily in the next stress event. Banks and their trade groups argue that some parts of the framework go too far, especially in the trading book and derivatives business, where capital treatment can become blunt and discourage banks from making markets exactly when customers need them most.

The fight matters because Treasury trading is the plumbing of the U.S. financial system. If banks decide that holding or financing certain positions carries too much capital cost, they may commit less balance-sheet capacity to market-making, leaving liquidity thinner in calm periods and more fragile in a selloff. Reuters reported that Wall Street groups warned the rules could reduce Treasury market liquidity, underscoring how Basel Endgame now sits at the intersection of bank profitability, credit supply and the ability of the bond market to absorb shocks without sudden dislocations.