According to recent reports, the Federal Reserve has presented a revised proposal for the final rules of the Basel III framework to various U.S. regulatory bodies, which significantly relaxes capital requirements for major Wall Street banks. Some officials estimate that the new proposal will reduce the overall capital increase for most large banks to between 3% and 7%, significantly lower than the 19% increase proposed in 2023 and the 9% increase suggested in last year's compromise version. Banks with substantial trading portfolios may see even smaller capital increases or potential decreases. The final rules under Basel III aim to clarify how much capital banks must set aside to withstand economic downturns. Previously, Wall Street banks strongly opposed the original Basel III final rules proposed in 2023, arguing that significantly heightened capital requirements would increase borrowing costs and weaken U.S. banks' competitive position against international rivals. However, supporters highlighted the importance of these measures for financial stability.

Reports suggest that the Federal Reserve plans to unveil the new proposal as early as the first quarter of 2026, led by Michelle Bowman, the vice chair of supervision appointed by Trump earlier this year. Morgan Stanley recently indicated in a research report that the announcement of the new Basel III rules could indeed coincide with the first quarter of 2026. This also implies that the final rules for the supplementary leverage ratio (SLR) and new proposals for the global systemically important banks (GSIB) surcharge could advance simultaneously by the end of 2025. If the Basel III final rules are re-proposed in the first quarter of 2026, with a 90-day public comment period extending through the second quarter of 2026, Morgan Stanley anticipates that the final rules could be issued by the fourth quarter of 2026. At that point, banks will update their capital requirements and buffer arrangements in 2027, paving the way for optimal capital allocation in their models by 2030.

Morgan Stanley noted that as of the second quarter of 2025, large banks collectively hold $157 billion in excess capital. Rough calculations suggest that even if capital requirements increase by 7%, large banks will still retain at least $146 billion in excess capital. With further adjustments to subsequent capital rules (such as GSIB surcharges, SLR, and transparency in stress testing), the capital adequacy of banks could continue to improve. The firm added that the reduction in capital requirements would be most beneficial for banks with large trading portfolios, particularly Goldman Sachs (GS.US). For institutional mortgage-backed securities investors, if the reduction in capital is less than expected, it could pose a slight downside to bank demand but could benefit Ginnie Mae and Fannie Mae moderately.

However, more importantly, the clarity of regulatory rules and the certainty brought by their implementation are crucial. Morgan Stanley stated that it will await the specifics of the new proposal. The firm indicated that if the final rules of Basel III and other capital regulation changes are implemented clearly, it would be a positive signal, enabling banks to optimize their excess capital allocation more swiftly. If the reports are accurate, the proposed capital increase range of 3% to 7% is slightly higher than the firm's previously estimated "capital-neutral" scenario, but they believe specific details may still change during the rule-making and public comment periods.