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We authored this post jointly with our friend and colleague, Professor Jeremy Kress of the University of Michigan Ross School of Business.

On March 19, 2026, the U.S. bank regulatory agencies issued three notices of proposed rulemaking (NPRs) that would substantially weaken the regulatory capital framework for the largest U.S. banks. The proposals would: (1) revise the Basel III minimum risk-based capital rules for the largest banks; (2) recalibrate the surcharge for global systemically important banks; and (3) update the standardized approach risk-based capital rules.

These proposals are the latest in a sustained campaign to roll back the post-crisis capital framework. Earlier this year, the agencies finalized reductions to the supplementary leverage ratio for the largest banks, justifying that move on the premise that risk-based capital requirements would remain a binding constraint (see our September 2025 comment letter opposing those reductions). The latest proposals run directly counter to that premise. And the dilution of stress tests — another pillar of the post-crisis framework — compounds the effect further. The agencies present each change as modest and self-contained. But together, they represent a severe erosion of the safeguards put in place after 2008.

This post summarizes our forthcoming comment letter to the Federal Reserve, FDIC, and OCC opposing the proposals.

Two months ago, we argued that the Federal Reserve's balance sheet was already near its minimum level determined by demand factors, and that shrinking it significantly would risk heightened interest rate volatility without major changes that would themselves carry costs. To be sure, a smaller balance sheet is a worthy goal. It would reduce the Fed's presence in credit markets, limit the fiscal-like character that large-scale asset purchases acquire over time, and preserve dry powder for the next crisis.

Since our February post, both Fed policymakers and academicians have explored the factors influencing banks’ aggregate reserve demand, which is now the key driver of the Fed’s balance sheet scale. While they generally are more optimistic about reducing reserve demand, their proposals have not altered our judgment about the desired sequencing and pace of reserve management reforms.

Importantly, the proposed demand-reducing tools are largely untested at scale in the U.S. financial system. We do not know whether they would work as intended, how large their effects would be, or what unintended consequences they might produce. That uncertainty leads us to counsel caution and care, not confidence, as policymakers consider next steps.

This post discusses a range of reform options that are taking shape.