Is This the End of Basel III? The Changing Face of Regulation in Banking

Firstly, image credit - BIS Board of Directors, first meeting with the US Federal Reserve on the 13 September 1994.

In recent news I learned that the Basel Accord, which has long been a cornerstone of global banking regulation, may be on its way out. The news report suggests that the US government finds the Basel III and its recent iteration stifling to economic growth. But why?

In the United States, Senator Tim Scott and other policymakers are challenging the latest iteration, known as Basel III Endgame, questioning whether it remains suitable for today’s financial landscape. As banks face mounting regulatory pressures, the debate intensifies. Is Basel III still fit for purpose, or are we witnessing the beginning of its end?

A Short Overview of Basel III

The Basel Accord, more specifically the Basel III framework, was introduced to strengthen the financial system after the 2008 crisis. It was designed to prevent another economic meltdown by imposing stricter capital and liquidity requirements, ensuring banks remain resilient during financial stress. However, in the past three years, several major banks have collapsed, raising questions about Basel III’s effectiveness and future.

Its primary objectives were to:

• Increase capital requirements to help banks absorb financial shocks
• Introduce liquidity and leverage ratios to prevent excessive risk taking
• Strengthen stress testing and risk reporting to improve oversight

While these measures have reinforced banking resilience, critics argue that Basel III has also led to unintended consequences, including reduced lending, higher banking costs and regulatory burdens that disproportionately impact smaller financial institutions. This has created knock-on effects across the economy.

Tim Scott’s Concerns: Basel III’s Impact on US Banks

In a recent interview with Maria Bartiromo, Senator Tim Scott, a leading critic of unnecessary banking regulation, highlighted several key threats and issues that he believes could undermine the US banking sector and economy. His concerns centre on the following issues:

Capital Requirements: Will Stricter Rules Stifle Growth?

One of Tim Scott’s primary objections is the proposal to increase capital requirements for large banks. Basel III Endgame could raise capital buffers by up to 19 to 24 percent, forcing banks to hold more equity to cover potential losses.

Regulators argue that this will enhance financial stability, but Tim Scott warns it could restrict banks’ ability to lend, particularly to small businesses and consumers. If banks are compelled to hold more capital, they may reduce the number of loans they issue or increase interest rates to compensate, potentially slowing economic growth.

Industry leaders in banking and finance share this concern, cautioning that excessive capital requirements could:

• Reduce credit availability, making it harder for businesses to invest and expand
• Increase borrowing costs, dampening consumer spending
• Push financial activity into the shadow banking sector, where risks are harder to monitor

The De-banking Controversy: Who Gets Left Behind?

Another growing concern is de-banking. This is the practice of financial institutions closing or restricting accounts based on perceived risk, regulatory pressure or political factors. While de-banking is often justified as a method for managing financial crime risks, critics argue that it has expanded into a broader issue that unfairly targets certain businesses and individuals. A high-profile example in the US is Melania Trump.

Tim Scott pointed out that stringent Basel III requirements could worsen de-banking, as banks may be incentivised to reduce risk exposure by cutting off accounts they deem too costly or risky to maintain. This could disproportionately affect:

• Small and medium sized businesses that lack the compliance resources of larger corporations
• Entrepreneurs and start-ups seeking financing but facing stricter risk assessments
• Industries deemed high risk, such as cryptocurrency and other sensitive sectors

This concern extends beyond the United States, as Basel III standards apply globally. If banks reduce services to certain customer groups due to regulatory pressure, financial exclusion could become widespread, undermining efforts to promote a more inclusive financial system.

The Impact on Competitiveness

Basel III Endgame could put US banks at a competitive disadvantage against international counterparts. Unlike Europe, where banks rely more on direct financing from capital markets, the US financial system is more dependent on bank lending.

If US banks face higher capital requirements than their global peers, they may struggle to compete in international markets. This could lead to:

• A reduced market share for US financial institutions in global banking
• Greater reliance on non-bank lenders operating outside traditional regulatory frameworks
• A shift in investment flows as businesses seek financing from less regulated sources

In an increasingly interconnected financial world, regulatory misalignment between major economies could create unintended disruptions, potentially weakening the US banking sector instead of strengthening it. This is especially relevant as the US, under President Donald Trump, seeks to boost economic growth.

What Comes Next? The Future of Banking Regulation

Given these concerns, the key question remains. Is Basel III Endgame the right path forward, or is it time to rethink banking regulation altogether?

Potential Regulatory Reforms

Some policymakers and industry leaders have called for a more tailored approach to banking regulation, focusing on:

• Revising capital rules to balance financial stability with economic growth
• Addressing de-banking risks by ensuring fair access to financial services
• Aligning global regulatory frameworks to maintain competitiveness while avoiding market distortions

In the United States, the Federal Reserve, FDIC and OCC are currently reviewing feedback on Basel III Endgame, and revisions may be made before final implementation. However, this regulatory debate extends beyond the US, with potential ramifications for financial markets worldwide, particularly in the UK and Europe.

The UK Perspective: Implications for ICARA and Banking Stability

For the UK banking sector, potential changes to Basel III in the US raise critical questions about capital adequacy requirements and financial resilience. The UK’s prudential regulation is overseen by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), with frameworks like ICARA, the Internal Capital Adequacy and Risk Assessment, playing a key role in risk and capital management.

ICARA ensures firms maintain sufficient capital and liquidity to withstand financial stress. If Basel III is significantly altered or weakened in the US, UK regulators may face pressure to reassess ICARA’s capital standards, particularly in areas such as:

• Capital Buffers and Stress Testing. If US banks operate under a more relaxed capital regime, UK financial institutions may find themselves at a competitive disadvantage.
• Risk Weighting and Lending Constraints. Changes in Basel III policies could influence how UK regulators assess risk weightings for various asset classes.
• De-banking and Financial Inclusion. The ongoing de-banking debate, particularly in high risk or emerging industries, may prompt UK regulators to review policies to ensure financial services remain accessible. Nigel Farage is a high-profile example of de-banking in the UK.

The Endgame. Will the Regulatory Revolution Be Televised?

“When a butterfly flaps its wings in the United States, a forest fire starts in Europe.”

The impact of US regulatory changes will not stop at its borders. If the US reconsiders its banking regulations to reflect modern realities, global banking frameworks may be forced into a chain reaction of reforms, reshaping financial stability strategies across Europe, Africa and beyond.

Policymakers, economic leaders and industry experts continue to warn that excessive regulation could slow economic growth, limit credit access and weaken US banks on the global stage.

Mending A Broken System or a Building Something New

All Basel frameworks, Basel I, II and III, were reactive measures, introduced in response to financial crises. Now, in 2025, Basel III Endgame shows that we are still relying on a patchwork system to govern a rapidly evolving financial ecosystem.

You cannot keep patching up old car tyres instead of replacing them for the road ahead. Eventually, they will blow out, potentially causing a major accident.

What we need is a dynamic risk model that is scalable for at least the next 50 years, based on deep scenario analysis. My book, Get Risky or Get Lost: The Psychology, Science and Art of Precision Risk-Taking may be a great place to start thinking risk dynamically for the world we live in today. After all, we will not be living on Mars anytime soon, or at least not until the first bank is built there. Take note, Elon.

Take Risk. Achieve Purpose!

Your Risk Champ,

Chizubel Beluchi