Basel III Endgame 2026: What the March Re-Proposal Means for Capital Planning at Regional and Community Banks

TL;DR

• The Fed, OCC, and FDIC issued a Basel III Endgame re-proposal on March 19, 2026, substantially reducing the capital impact from the July 2023 original — roughly $87.7 billion less system-wide CET1 required.
• Category I/II banks (GSIBs) see ~4.8% CET1 reduction vs. the original; Category III large regionals ~5.2%; Category IV regionals ~7.8%.
• Category III and IV banks now face AOCI recognition requirements for the first time, with a five-year phase-in beginning January 1, 2027 — the most significant change for regional bank capital plans.
• The comment period closed June 18, 2026. Capital planning teams should begin modeling final-rule scenarios now, not after adoption.

The comment period on the Basel III Endgame re-proposal closed yesterday.

That’s not a procedural footnote. It’s the last formal opportunity the industry had to shape a set of capital rules that will define how much buffer your bank needs to hold against every mortgage, commercial loan, and trading position for the foreseeable future. The agencies will now digest comments, respond, and finalize — and when they do, a compliance clock will start running.

If your capital plan still reflects the original July 2023 proposal’s assumptions — or worse, hasn’t been updated for the March 2026 re-proposal at all — you’re modeling the wrong number. The re-proposal made substantial changes. Most of them are favorable. One of them is going to require real work from Category III and IV banks before 2027.

Here’s what changed, what it means for capital planning, and what your team needs to do in the next 90 days.

Why the Original Proposal Got Pulled Back

The July 2023 Basel III Endgame proposal would have required large U.S. banks to hold roughly 16% more capital overall — the most significant restructuring of bank capital rules since Dodd-Frank. The industry response was immediate and unusually unified: major bank CEOs testified before Congress, community banks flooded the agencies with comment letters arguing that standardized approach overhaul would distort mortgage pricing and compress credit availability, and regional bank trade associations ran sustained public advocacy campaigns.

The agencies withdrew the proposal in early 2025 and spent more than a year rebuilding it. The March 19, 2026 re-proposal reflects the results of that work — a revised framework with meaningfully reduced capital impact, structural changes to several contested provisions, and a cleaner phase-in timeline.

The headline number: approximately $87.7 billion less CET1 required system-wide under the re-proposal compared to the original. For the largest banks, that’s real capital available for lending, buybacks, or dividend capacity. For regional banks, the picture is more nuanced — and in one important respect, more demanding than current rules.

CET1 Impact by Bank Category

The re-proposal’s capital relief is concentrated in the upper tiers of the bank size distribution, but all covered categories benefit relative to the July 2023 baseline:

These figures represent relief versus the original proposal — not versus today’s rules. Most affected banks under the re-proposal would still hold more capital than they do today, but substantially less than the 2023 proposal would have required.

For community banks below the $100 billion threshold: you’re not subject to advanced approaches or most of the re-proposal’s complex provisions. But the standardized approach changes to credit risk weights and operational risk capital apply more broadly. Don’t dismiss Basel III Endgame as a large-bank-only problem without verifying that the standardized methodology changes don’t affect your risk-weighted asset calculations.

The Change That Matters Most for Regional Banks: AOCI Recognition

If you’re running capital planning at a Category III or IV bank — generally between $100 billion and $700 billion in assets — the accumulated other comprehensive income (AOCI) recognition requirement is the provision that will drive the most work in your ICAAP before final rules take effect.

Under current rules, only Category I and II banks must include AOCI in CET1. This means unrealized gains and losses on available-for-sale (AFS) securities flow directly through the regulatory capital ratio. Category III and IV banks can opt out — which means that even when rising rates push AFS portfolios deeply underwater, the mark-to-market loss doesn’t hit your reported CET1.

The re-proposal eliminates that opt-out for Category III and IV banks.

All four categories of covered institutions will be required to recognize AOCI in CET1, with a five-year phase-in starting January 1, 2027. The phase-in gives regional banks time to prepare — but preparation needs to start now.

What this means in practice:

If your AFS portfolio carries unrealized losses — which many mid-sized bank portfolios do following the 2022–2024 rate cycle — those losses will progressively reduce your reported CET1 under the new framework. The phase-in means you won’t absorb the full hit on day one, but you’ll see stepped reductions over five years as the recognition percentage climbs toward 100%.

Silicon Valley Bank will be in the room whenever your examiners review your AOCI analysis. The mechanism that destroyed SVB’s capital position before liquidity stress fully materialized was the AFS unrealized loss that management knew about but regulators couldn’t see in the regulatory capital ratio. The AOCI recognition requirement is the rule change that addresses that gap — and examiners will want to see that your capital plan takes it seriously.

Capital planning actions for Category III/IV banks:

1. Quantify your current AOCI position and model what full recognition would mean for your CET1 ratio at each phase-in step through 2032
2. Sensitize to rate scenarios: run your capital ratio through +100 and +200 basis point rate shocks under full AOCI recognition, not just current treatment
3. Review your AFS/HTM designation strategy: some institutions will consider reclassifying bonds from AFS to held-to-maturity (HTM) to limit AOCI volatility — with full awareness that HTM designations lock in accounting treatment and reduce asset-liability flexibility
4. Update your ICAAP narrative to reflect AOCI as a quantified capital risk factor requiring monitoring and scenario analysis
5. Check your capital policy buffer: if your internal CET1 operating minimum was set assuming AOCI exclusion, it needs to be revisited

MSA Capital Treatment: An Important Change for Mortgage Banks

The 2023 proposal would have required banks to deduct mortgage servicing assets exceeding 10% of CET1 directly from capital. For banks with significant mortgage servicing operations, this was a potentially material hit that would have directly reduced CET1 dollar-for-dollar.

The March 2026 re-proposal replaces the MSA deduction approach with a 250% risk weight. This changes the mechanics substantially: instead of a direct capital deduction, MSAs generate risk-weighted assets that flow through the capital ratio denominator.

Whether 250% risk weight is better or worse than a direct deduction for a specific institution depends on your MSA portfolio size relative to total RWA and your current capital ratios. For most regional banks with mortgage banking operations, the risk weight approach is more favorable than a direct deduction. Quantify it for your portfolio before drawing conclusions.

The Output Floor: Whether It Binds Your Institution

The 72.5% output floor limits how much benefit banks can derive from internal models by requiring that model-based capital cannot fall below 72.5% of the standardized approach calculation.

For most community banks and smaller regional institutions that use the standardized approach for all risk categories, the output floor is not the binding constraint. You’re already calculating capital on a fully standardized basis — the floor doesn’t change anything for you.

The output floor primarily affects Category I, II, and larger Category III banks with sophisticated model-based capital frameworks. If your institution is growing toward the $100 billion threshold and beginning to consider advanced approaches adoption, the output floor is worth understanding conceptually — but it’s not where most regional bank capital planning effort needs to focus right now.

What Capital Planners Should Do in the Next 90 Days

The comment period closed yesterday. The agencies will work through comments and adopt final rules. Under the proposed timeline, final rules take effect two calendar quarters after adoption. If adoption happens by Q3 2026, the initial compliance date would be Q1 2027 — which aligns with the proposed January 1, 2027 AOCI phase-in start.

Your next ICAAP cycle needs to reflect this framework.

Run Two Scenarios

Model the re-proposal as written and a second scenario incorporating potential modifications from the comment process. Key variables: AOCI phase-in pace, MSA risk weight, output floor calibration, and operational risk capital methodology. Don’t build in assumptions that require the agencies to make additional favorable changes beyond what’s already in the re-proposal — they’ve already substantially revised the framework once.

Identify Your Binding Constraint

For most regional banks, the binding constraint will be either AOCI recognition (if the AFS portfolio carries significant unrealized losses) or operational risk capital (for banks with high-fee or high-volume business lines where the Business Indicator Component produces elevated capital requirements). Identify it, model it, and build capital buffer targets around it.

Integrate With Stress Testing

If your institution runs DFAST scenarios or internal capital adequacy stress tests, 2027 scenarios should incorporate Basel III Endgame capital floors and AOCI recognition. A stress test built on pre-Endgame capital calculations will understate capital risk in a scenario where the new framework has already taken effect.

For institutions with significant commercial real estate concentrations, the standardized risk weight changes under the re-proposal may also affect RWA calculations for CRE exposures — and your concentration risk analysis should reflect updated RWA thresholds if the risk weights change materially from current rules.

Update Capital Policy Thresholds

Your capital policy likely specifies internal operating minimums above regulatory minimums — something like “maintain CET1 at least 150 basis points above the regulatory minimum at all times.” If the regulatory minimum shifts under final rules, your absolute buffer target needs to be revisited. This is a board-level conversation. Have it before examiners ask whether your board understands the capital impact of the new requirements.

What Examiners Will Ask Starting in 2027

The agencies have been consistent in their supervisory expectations: covered institutions should maintain capital plans that reflect both current requirements and reasonably foreseeable regulatory changes. Once final rules are published — even before they take effect — supervisors will probe whether your ICAAP incorporates them.

Expect examination scrutiny on:

• Whether your capital projections reflect AOCI recognition under the phase-in schedule
• Whether rate sensitivity analysis in your capital plan accounts for AOCI treatment under the new framework
• Whether your board has been briefed on the material capital impact of Endgame requirements applicable to your institution
• Whether capital policy thresholds remain adequate given the new regulatory minimums
• Whether your scenario analysis explicitly models the output floor (if applicable to your category)

For institutions with credit risk KRI programs, this is also an opportunity to align capital-related risk indicator thresholds with the incoming regulatory framework. KRI trigger levels calibrated against current capital rules may need recalibration once Endgame requirements take effect — particularly AOCI-sensitive thresholds.

What the Final Rules Might Still Change

Several provisions attracted substantial comment, and some refinement is likely:

Operational risk capital (BIC methodology): The Business Indicator Component for calculating operational risk capital has drawn criticism for being disproportionately sensitive to fee income — particularly for wealth management, custody, and servicing businesses. Expect pressure to recalibrate BIC multipliers.

Residential mortgage risk weights: The re-proposal’s standardized risk weights for residential mortgages differ from current weights in ways that affect mortgage pricing at the margin. Mortgage industry groups pushed hard on this provision.

AOCI phase-in pace: Some comment letters requested a longer phase-in period or higher initial recognition floors to give institutions more time to adjust portfolio duration without being forced into HTM designations that reduce asset-liability flexibility.

Plan for the re-proposal as written. Build scenario variability around the provisions most likely to change. Don’t model assumptions that require the agencies to go further than they already have.

So What?

The March 2026 Basel III Endgame re-proposal is materially more favorable than the 2023 original. Most affected banks will face lower capital requirements than the original proposal implied, and the phase-in timeline gives institutions real runway.

But “more favorable than expected” is not “no action required.” For Category III and IV banks, AOCI recognition is a structural change to how your CET1 ratio behaves in rate environments — and it starts phasing in January 1, 2027. The five-year timeline sounds long until you account for ICAAP update cycles, board approval processes, investment portfolio review, and the fact that your next examination will ask whether your capital plan reflects the new requirements.

Capital planning teams that start modeling now — before final rules, before the compliance clock starts — will have time to update ICAAP narratives, brief boards, and adjust investment portfolio strategies with room to maneuver. Teams that wait for the final rule to be published will be doing remediation under time pressure.

The comment period is closed. The planning period has started.

The Financial Risk Management Kit includes capital planning frameworks, risk indicator templates, and policy documentation for teams building or updating their capital adequacy programs for the Basel III Endgame transition.