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The Federal Reserve plans to release rules in the coming weeks to implement the final phase of Basel III in the United States. The proposal would reshape capital standards for the largest banks. It would also apply a 1250% risk weight to Bitcoin, placing the asset among the highest-risk exposures in the framework.
Michelle W. Bowman, Vice Chair for Supervision at the Board of Governors of the Federal Reserve System, outlined the approach during remarks at the Cato Institute in Washington, DC. She said the changes aim to remove overlap, fix long-standing gaps, and better match capital requirements with actual risk.
The proposal covers four pillars of the capital framework for the largest banks. These are stress testing, the supplementary leverage ratio, Basel III risk-based capital requirements, and the global systemically important bank surcharge. What will this mean for banks that want exposure to Bitcoin under a stricter capital regime?
The Basel III Endgame marks the final stage of a long global effort to strengthen bank capital standards after the financial crisis. The framework targets credit risk, market risk, and operational risk. It aims to improve resilience across the banking system.
The Federal Reserve proposal builds on the 2017 Basel agreement. At the same time, it adjusts the rules to reflect US banking and financial market structures. Bowman said finalizing the reforms would give banks greater certainty for planning and management.
A key part of the proposal removes duplicative capital calculations for the largest banks. Those banks now maintain two risk-based capital ratios. One uses a standardized approach, while the other relies on internal model-based advanced approaches.
Bowman said the duplicate system creates a burden without a comparable benefit. The proposal would establish a single method for calculating risk-based capital requirements for the largest banks. Regulators say this change would simplify the framework while preserving safety and soundness.
The proposal describes Bitcoin’s 1250% risk weighting as part of the wider Basel III treatment of higher-risk assets. Regulators link that treatment to Bitcoin’s volatility and evolving market structure. They also point to operational risks tied to custody and crypto transactions.
The text says this treatment is not entirely new in finance. Certain high-risk assets, including some unrated corporate debt and some derivatives, can face similarly heavy risk weights. Even so, Bitcoin’s treatment shows the depth of regulatory caution around digital assets.
The Federal Reserve’s approach also reflects concern about regulatory arbitrage. Policymakers want capital rules that limit incentives to shift risk into less regulated channels. As a result, the Bitcoin measure fits into a broader pattern of tougher scrutiny across the crypto sector.
The revised framework also aims to support credit flows to households and businesses. It would improve risk sensitivity in lending by recognizing loan-to-value ratios in mortgage capital requirements. It would also reflect repayment history in retail lending.
The proposal does not add new capital penalties for mortgages or consumer lending. It also seeks public feedback on the role of private mortgage insurance. In addition, it would align business lending requirements more closely with borrower credit quality.
For operational risk, the framework introduces standardized requirements tailored to large US banks. Fee-based businesses, such as credit cards, would account for revenues and expenses on a net basis. Staff analysis found that wealth management and custody services have shown lower operational risk over time.
Also Read: How Federal Reserve Decisions Impact Stocks, Bonds, and Crypto?
The proposal also strengthens capital requirements for trading activity. Bowman said the method would better capture losses in stressed conditions and reflect the risk of less liquid positions. It also introduces a standardized calculation across firms while reducing the burden for banks with simple trading activities.
For derivatives, the framework adds a credit valuation adjustment requirement for banks with significant trading activity and material portfolios. This rule focuses on bilateral transactions among large financial firms. It avoids unintended costs for commercial end users, including farmers and manufacturers.
Bowman also said the Fed reviewed the overlap between stress testing and the risk-based framework. She noted that overlap can produce excessive requirements for some activities, even though stress testing adds useful risk sensitivity.
The Federal Reserve is moving toward final Basel III rules that would assign Bitcoin a 1,250% risk weight and revise capital standards for large US banks. Michelle Bowman said the plan also targets stress testing, leverage rules, lending, trading, and operational risk as regulators seek a more unified framework.
