Three Wall Street groups urge US regulators to ease Basel rules

Three top financial trade bodies warned US regulators that planned Basel Endgame capital rules would hurt Treasury market liquidity, urging revisions to the framework.

Three of the world's largest financial trade bodies have urged US regulators to revise proposed Basel Endgame capital requirements, warning the rules as drafted would impair liquidity in the $28 trillion Treasury market, the Financial Times reported Thursday.

The groups sent a joint letter to the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, according to a copy of the letter cited by the FT. The letter argues that the current proposals would force banks to hold significantly more capital against Treasury and repo activity, potentially reducing their willingness to intermediate in the world's deepest government bond market.

The Basel Endgame framework, which implements the post-2008 global capital standards known as Basel III, has been a flashpoint between regulators and the banking industry since US authorities proposed their version in July 2023. The original implementation date of July 2025 has already been pushed back after intense industry lobbying, and the latest letter signals that Wall Street is seeking further concessions.

The pushback comes as the Fed holds its benchmark rate at 3.50%-3.75%, with most major brokerages including Goldman Sachs, JPMorgan and Morgan Stanley expecting no policy change for the rest of 2026, according to a Reuters survey. If regulators accommodate Wall Street's demands, bank profitability could improve through lower capital charges on government bond trading. If they hold firm, lenders may face higher compliance costs that could constrain market-making capacity at a time when Treasury issuance remains elevated.

At the center of the dispute is how the rules treat banks' trading books, particularly holdings of US government debt. The industry argues that imposing higher risk weights on Treasuries — traditionally considered risk-free assets — would force dealers to reduce their balance sheet commitments, amplifying volatility during stress events. The letter cites the September 2019 repo market turmoil and the March 2020 Treasury market dysfunction as examples of what could become more frequent under tighter capital constraints, according to the FT report.

The outcome carries implications beyond bank stocks. A less liquid Treasury market would raise borrowing costs for the US government and ripple through mortgage rates, corporate bonds and municipal debt. The Congressional Budget Office projects the federal deficit will reach $1.9 trillion in fiscal 2026, keeping upward pressure on debt issuance at a time when the Treasury's borrowing needs remain elevated.

This article is for informational purposes only and does not constitute investment advice.