Bank Capital Rules: Fed Locks In Stress Test Relief Before Basel

The first piece of the overhaul is in place

Wall Street's push to rewrite post-crisis capital rules has moved from proposals to final rules, and it arrives just as the largest U.S. banks post some of their best numbers in years. On September 30, the Federal Reserve voted 6-1 to approve two final rules overhauling its annual stress test. The Fed says the changes should cut year-to-year swings in required capital by about half without materially changing the total amount of capital held across the system.26 The central bank describes the overhaul as a way to make capital levels more predictable. Its critics see a quieter retreat, and the record so far gives some support to both readings.

The package has two main parts. The first requires the Fed to take public comment on each year's stress scenarios and on any material changes to its models. It also tests banks with large trading books against two global market shocks each year and counts whichever one produces the bigger loss.57 The second changes how the stress capital buffer is set: starting in 2028, it will be based on the average of a bank's two most recent stress tests rather than only the latest one.35 One account notes that the rule itself takes effect December 1, 2026, that the date on which new buffers kick in each year moves from October 1 to January 1, and that the first averaged requirements will not bind until 2029.8

Vice Chair for Supervision Michelle Bowman said the changes keep the test "transparent, granular and risk-sensitive."5 Governor Michael Barr, her predecessor in the supervision role, cast the only dissenting vote. He warned that publishing the models and putting changes out for annual comment will make the test "less responsive to emerging risks" and let banks tune their balance sheets to the exam rather than to their actual risks.5

Not finished yet: Basel and the GSIB surcharge

Framing this as the Fed "finalizing" its capital overhaul overstates where things stand. The stress-test rules are done. The bigger pieces are not: the rewritten Basel III endgame and changes to the surcharge on global systemically important banks (GSIBs). Bowman has said she expects to finalize the risk-based capital reforms and the GSIB surcharge changes before the end of 2026.4 Reuters reporting, as republished, describes the Fed working toward the largest overhaul of bank capital rules since the 2007-09 crisis by year end.9

The numbers on the table are large. The March proposal dropped the stricter 2023 Basel plan in favor of a new Expanded Risk-Based Approach. By the agencies' estimates, it would cut Common Equity Tier 1 (CET1) requirements by roughly 4.8% for the largest banks, 5.2% for regional banks and 7.8% for community banks.1 The Fed also projects an average 40-basis-point cut to the GSIB surcharge, about $23 billion in aggregate capital.1

Accounts of the effect on the biggest banks differ. Fitch notes that, by the Fed's own math, the Basel portion alone would actually raise aggregate CET1 requirements for the largest (Category I and II) banks by 1.4%, because market risk, operational risk and credit valuation adjustment charges go up. Fitch adds that the coming changes to the GSIB surcharge and the stress test will more than offset that increase.34 Read together, these figures suggest the 4.8% cut for the largest banks depends on the full package rather than on Basel by itself. For the megabanks, that makes the surcharge the most important item still undecided.

The banks are not done lobbying. Industry executives say some large banks are pressing Bowman for further surcharge cuts and for changes to how unused credit card lines are treated. They also want Democratic governors to vote for the final package, on the view that a bipartisan vote would make the rules harder for a future Fed to undo.9 That second goal shows the industry knows its 2026 gains could be reversed under different leadership.

The rule that came first

The stress-test overhaul follows earlier relief on leverage. In November 2025, the Fed, FDIC and OCC finalized changes to the enhanced supplementary leverage ratio (eSLR), which took effect April 1, 2026.11 The rule cut the holding-company standard from 5% to 3% plus half of each firm's Method 1 GSIB surcharge. Bank subsidiaries fell from 6% to 4%.17 Regulators estimated it would lower tier 1 capital requirements by about $13 billion for GSIBs and $219 billion for their main bank subsidiaries.15 The OCC stressed that most of the subsidiary-level capital cannot be paid out to shareholders because holding-company requirements still apply.19 The Fed approved that rule 5-2, a closer vote than the unanimous approvals at the FDIC and OCC.17

So far the steps have followed a pattern. Each one has been presented as a technical fix: making the leverage ratio a backstop, reducing volatility in the stress test, removing duplicate calculations in Basel. The Fed has said the stress-test change will not materially alter total capital, and the leverage rule's headline holding-company cut was under 2%.615 Taken one at a time, the changes are modest. Taken together, they are a clear change in direction from the 2023 plan.

Profits are rising anyway

The banks seeking relief are hardly struggling. The six largest U.S. banks earned a combined $43.5 billion in the third quarter on about $165 billion of revenue.21 JPMorgan Chase earned $15.3 billion, and its net interest income rose 13% to $27.1 billion.21 Goldman Sachs earned $5.29 billion, or $17.01 a share, well above consensus forecasts, as equities trading revenue jumped 72%.2628 Citigroup's profit rose 40%.26 Wells Fargo's loans and deposits each grew 11%, growth that one analysis ties to the removal of its asset cap.2124

The quarter was not uniformly strong, though. JPMorgan posted a rare miss on both revenue and earnings, with fixed-income trading revenue down 4%.2629 Bank of America took a $1.2 billion regulatory settlement charge.21 Bank stocks also lagged: the S&P 500 Banks Index fell 5.4% in the third quarter while the broader S&P 500 rose about 2.3%.29

Interest rates are the real complication

The main reason is interest rates. Treasury yields have climbed to multi-decade highs, and the Fed raised rates in mid-September. That has stirred concerns about loan demand, credit quality and funding costs, even though higher rates usually help bank margins.38 Jamie Dimon warned that a move in rates from 5% to 6% "would be more painful" than the move from 4% to 5%.38 He also listed large fiscal deficits, sticky inflation and high asset prices as risks building beneath the surface.38

Higher rates also hit the same capital ratios the new rules are meant to loosen. Unrealized losses on Bank of America's bond portfolio passed $100 billion, and a Truist analyst said those markdowns had investors questioning whether buybacks would slow.35 Fitch notes that midsize banks will soon have to count these unrealized losses (AOCI) in regulatory capital. As of June 30, the estimated hit for large banks losing their opt-out ranged from 10 to 260 basis points, enough to eat into some of the relief.34

What banks will do with the freed-up capital

The standard expectation is that capital relief turns into buybacks. Fitch estimates that an 8% drop in risk-weighted assets would lift CET1 ratios by roughly 100 basis points on average. It also notes that nearly 70% of the banks it rates trade above 1.2 times book value, a level at which buybacks start to shrink tangible book value per share.34 It expects loan growth, running around 7% a year, to be a preferred use.34

JPMorgan has already moved that way. It cut third-quarter buybacks to $664 million from more than $6 billion the quarter before, even though Dimon put its excess capital at about $30 billion.38 He said explicitly that the cut had "nothing to do with AOCI or guessing about the environment or even Basel III." Instead, the bank believes it can redeploy the capital "at very good returns."35 Bank of America went the other way, buying back $6 billion of stock and finishing with a 10.9% CET1 ratio, the lowest of the six.21

The split matters for the policy debate. Supporters of the rewrite argue that freed capital will fund lending and Treasury market activity. If more banks follow JPMorgan's approach, that case gets stronger. If buybacks dominate, Barr's objection, that the system is losing safety margin to fund payouts to shareholders, becomes harder to dismiss.

The bottom line

The stress-test rules lock in more predictable capital levels, the leverage relief is already in effect, and the decisive Basel and surcharge decisions are expected within about two months. These changes come as profits are strong but rising rates expose weak spots in bank balance sheets. On balance, the overhaul is less about freeing up a large one-time pool of capital and more about making the regime friendlier to banks over time. The test is whether the Fed's supervisors can still catch rising risk once a two-year average smooths out a bad year.