Key Takeaways
- •The House Financial Services Committee evaluated revised Basel III proposals that would reduce Tier 1 capital requirements for large banks by approximately five percent compared to 2023.
- •Greg Baer (President & Chief Executive Officer, Bank Policy Institute) testified that the revised proposal still overstates capital needs by double counting risks already captured in stress tests.
- •Rep. Sherman (D, CA-32) and Robert Broeksmit (President & Chief Executive Officer, Mortgage Bankers Association) discussed how current capital rules penalize warehouse lenders and ignore private mortgage insurance.
- •Rep. Huizenga (R, MI-4) praised the proposal for right-sizing regulation to support lending, while Rep. Waters (D, CA-43) argued that reducing capital buffers leaves taxpayers vulnerable.
- •Regulators must now finalize the rules while addressing technical concerns regarding G-SIB surcharge calculations and the potential for overlapping operational risk requirements in future stress tests.
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Hearing Analysis
Overview
This hearing examined the 2026 revised capital proposals released by U.S. prudential regulators, focusing on the "Basel III Endgame" standards, the standardized approach for risk-weighted assets, and the surcharge for globally systemically important banks (G-SIBs). The discussion centered on whether the revised framework strikes an appropriate balance between ensuring financial stability and fostering economic growth through accessible credit. Lawmakers and witnesses compared the new 2026 proposals to the widely criticized 2023 version, debating whether the reduction in required capital buffers represents a necessary "right-sizing" of regulation or a dangerous deregulatory shift that could leave the economy vulnerable to future shocks.
Key Testimony & Policy
The testimony highlighted significant technical shifts in the revised Basel III framework. Mr. Greg Baer, President and CEO of the Bank Policy Institute, argued that while the 2026 proposal is more "cogent" and risk-sensitive than its predecessor, it still overstates capital needs by double-counting risks between the Federal Reserve’s stress tests and the Basel rules. He specifically pointed to the 65% risk weight for investment-grade corporate loans as being too high compared to historical loss data. Conversely, Ms. Mayra Rodriguez Valladares, Managing Principal of MRV Associates, warned that the proposals would strip $60 billion from the capital buffers of the eight largest U.S. G-SIBs, representing a 6% reduction in Tier 1 capital requirements. She argued this weakening occurs at a time of heightened geopolitical tension and emerging risks from AI and climate change.
Specific attention was paid to the mortgage and agricultural sectors. Mr. Robert Broeksmit, President and CEO of the Mortgage Bankers Association, praised the removal of "gold plating"—requirements that exceeded international standards—particularly the decision to abandon punitive mortgage risk weights from the 2023 proposal. He advocated for reducing the risk weight on Mortgage Servicing Assets (MSAs) from 250% back to 100% and aligning the risk weight of warehouse lines of credit with the underlying mortgages. For the agricultural sector, Mr. Reginald Griffith, Global Head of Regulatory Compliance at Louis Dreyfus Company, testified on behalf of the Commodity Markets Council. He stated that the 2026 proposal preserves clearing capacity for futures markets, which is essential for farmers to hedge risks without facing prohibitive costs that would ultimately increase food prices for consumers.
Legal and structural implications were addressed by Mr. Luigi De Ghenghi, Partner at Davis Polk & Wardwell LLP, who noted that the 2026 version better tailors rules to the U.S. banking sector by avoiding unnecessary add-ons for residential mortgages and retail exposures. He emphasized that the move toward a standardized approach for operational risk is a modernization but cautioned that regulators must ensure banks are not forced to hold capital twice for the same potential losses under both the new rules and existing stress testing models.
Notable Exchanges & Partisan Dynamics
The hearing featured a sharp divide over the lessons of past financial crises. Rep. Maxine Waters (D, CA-43) and Rep. Stephen Lynch (D, MA-8) expressed deep concern that the proposals represent a "reckless deregulation" similar to the environment preceding the 2008 financial crisis. Rep. Lynch specifically cited the 2023 failures of Silicon Valley Bank (SVB) and Signature Bank, arguing that reducing capital buffers while the "Genius Act" allows banks to hold uninsured deposits for stablecoin issuers like Circle creates a "major disaster" in waiting. Ms. Valladares supported this view, suggesting that the Federal Reserve's Vice Chair for Supervision’s dissent on the proposal signaled credible internal concerns.
In contrast, Republicans, led by Rep. Bill Huizenga (R, MI-4) and Rep. Andy Barr (R, KY-6), argued that the 2023 proposal was an overreach that would have stifled Main Street lending. Rep. Barr noted that U.S. banks already hold substantially more capital than they did two decades ago and that the 2026 revisions move toward a more "pro-growth, tailored" approach. A notable exchange occurred between Mr. Baer and Rep. Juan Vargas (D, CA-52) regarding a "helmet" analogy for capital. While Mr. Baer argued that wearing a helmet (holding capital) at all times has costs that can outweigh benefits, Rep. Vargas countered that because regulators cannot predict when a "crash" (crisis) will occur, the helmet must be worn consistently to protect the public.
Rep. Brad Sherman (D, CA-32) and Rep. Sean Casten (D, IL-6) focused on specific technical improvements, such as the fair treatment of clean energy tax credits and the need to recognize private mortgage insurance in risk weight calculations. Rep. Sherman also highlighted the importance of marking-to-market losses on held-for-sale securities to prevent another SVB-style collapse.
Organizations Mentioned
- Federal Reserve System (Federal Reserve): Discussed extensively regarding its role in issuing the 2026 capital proposals and its ongoing stress testing regime. - Basel Committee on Banking Supervision: Mentioned as the international body that sets the global standards which the U.S. "Endgame" proposal seeks to implement. - Mortgage Bankers Association (MBA): Represented by Mr. Broeksmit, who advocated for changes to mortgage servicing asset (MSA) and warehouse line risk weights. - Bank Policy Institute (BPI): Represented by Mr. Baer, who argued that current capital levels are already sufficient and that the new proposal still contains "double counting." - Silicon Valley Bank (SVB): Frequently cited by Democrats as a cautionary tale regarding the dangers of inadequate risk management and liquidity. - Consumer Financial Protection Bureau (CFPB): Mentioned by Democrats who expressed concern that the agency's oversight capacity has been weakened alongside the proposed capital reductions. - Louis Dreyfus Company (LDC): Represented by Mr. Griffith to illustrate the impact of capital rules on agricultural commodity merchants and futures clearing. - Federal Deposit Insurance Corporation (FDIC): Identified as one of the three primary regulators (alongside the Fed and OCC) responsible for the joint capital rulemaking.
What's Next
The prudential regulators (Federal Reserve, FDIC, and OCC) are currently in a notice-and-comment period for the three NPRs released in March 2026. Witnesses and lawmakers called for a "single integrated analysis" of the combined impact of all three proposals before they are finalized. Ms. Valladares specifically urged Congress to hold joint oversight hearings before June 18 and recommended codifying liquidity standards for "Category IV" banks (those with $100 billion to $250 billion in assets) through targeted amendments to the Dodd-Frank Act. The committee will likely monitor the Federal Reserve’s upcoming adjustments to its stress testing models, which are intended to address the "double counting" of operational and market risks identified during the hearing.
Transcript
The Committee on Financial Services will come to order and without objection the chair is authorized to declare recess of the committee at any time. And if I can just get the attention of my colleagues. We first and foremost wanted to have an acknowledgment here today before we got started. We would be remiss if we did not acknowledge the passing of our colleague and friend Representative David Scott and obviously represented by the flowers at his spot. I think I can speak for many in the committee that once you got to know David the layers and depth that was there was impressive. And he and I had actually had a chance to work on a few pieces of legislation together but didn't really get to know each other until we sat on an airplane next to each other flying down to Atlanta as I was doing a rather circuitous route back to Michigan. But I really truly believe that that was an opportunity to get a picture into what David was about and he was a fascinating guy, very smart man, very experienced man and for me personally and I think on behalf of all of us we'd like to extend our prayers and deepest condolences to his family, his friends, his staff and frankly all that had worked alongside of him both on this committee as well as agriculture and his work there. And in honor of his life and dedication to service this House, this committee and to the people of Georgia I ask that we observe a brief moment of silence. Godspeed David, a race well run. Hard to transition from that but we must get back to our business as well. Today's hearing is titled Prioritizing Main Street: Evaluating the Impact of Capital Proposals on Economic Growth and American Communities. And without objection all members will have five legislative days within which to submit extraneous materials to the chair for inclusion in the record. And I will now recognize myself for four minutes for an opening statement. Today's hearing will examine the recently released capital proposals from our prudential regulators concerning Basel III, the standard approach and the GSIB surcharge. That GSIB surcharge has been debated for a long time. In March the OCC, the FDIC and the Federal Reserve released revised Basel III regulations aimed at updating U.S. bank capital requirements for the largest banks. These revisions respond to bipartisan and widespread concerns raised about the earlier 2023 proposal and attempt to refine how capital standards are applied across institutions. They also released a proposal that would make certain adjustments to the standardized approach capital rule which applies generally to banks. Additionally the Fed issued a proposal to adjust the capital surcharge application to globally systemically significant banks or GSIBs. Right sizing bank regulation is critical to ensure that capital standards are appropriately tailored to risk and do not restrict lending by institutions that play a critical role in supporting our local economies. Capital requirements should promote investment, not compound on one another and impose capital levels well above what actual risk warrants. We must also pay special attention to America's competitive position on the world stage. The 2023 proposal contained requirements that diverge significantly from global standards placing U.S. financial institutions at a disadvantage. This revised framework takes steps to realign U.S. requirements with international norms. American capital markets are the broadest and deepest in the world and it's important that bank capital requirements promote their proper functioning. The prior administration's overly punitive proposal would have had significant consequences for bank securities underwriting, hedging, securitization and equity investments in funds. The revised proposal does more to ensure that banks continue their crucial work as intermediaries that risk flow to those most able to manage them. As we review these proposals we must ensure they strike the right balance between preserving safety and soundness in our financial system while fostering the kind of economic growth that benefits every American. Committee Republicans have consistently advocated for a capital framework that works not just for regulators or large institutions but for everyday Americans who depend on access to credit to buy homes, start businesses and invest in their futures. For example this revised proposal abandons the punitive mortgage risk weights from the 2023 proposal that drew bipartisan criticism from this committee helping to protect access to affordable home loans for American families. It is Congress's responsibility to ensure these proposals are clear, appropriately targeted and do not create unintended consequences that could ripple through our economy. With that I look forward to hearing from our witnesses today and I yield back. So I will now recognize the ranking member of the Subcommittee on Financial Institutions Dr. Foster for one minute for an opening statement.
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