Banking Agencies Propose Wide-Ranging Capital Reforms: Five Things for Regional, Mid-Sized, and Community Banks to Know

On March 19, 2026 the federal banking agencies issued proposed rules to revise the U.S. regulatory capital framework. The proposals would update the capital treatment of certain exposure categories under the standardized approach to calculating capital (“Standardized Approach Proposal”), implement Basel III requirements for larger banks and banking organizations with significant trading activity (“Basel III Endgame Proposal”), and change capital surcharges for U.S. global systemically important banks (“U.S. G-SIBs”) (“G-SIB Surcharge Proposal”).

While much attention will be paid to the proposals’ impacts on the largest banks, particularly U.S. G-SIBs, this alert summarizes key takeaways for regional banks — which we define as Category III and IV firms, i.e., banks with total consolidated assets between $100 billion and $700 billion — and for mid-sized and community banks with assets under $100 billion.[1]

Comments on the proposals are due June 18, 2026.

1. The Standardized Approach Proposal is expected to meaningfully reduce aggregate capital requirements for regional, mid-sized, and community banks.

The agencies estimate that the Standardized Approach Proposal would decrease aggregate common equity Tier 1 (“CET1”) capital requirements for Category III and IV holding companies by 3 percent, and, together with changes to the stress test framework proposed in October 2025, by a total of more than 5 percent. Estimated reductions to the capital requirements for bank subsidiaries of Category III and IV holding companies are slightly larger, at 4.7 percent. For smaller banking organizations, expected reductions to CET1 capital requirements under the proposal are between 7.5 and 7.9 percent (for holding companies) and 7.7 and 8.3 percent (for bank subsidiaries), depending on asset size.

2. The Standardized Approach Proposal would generally reduce capital requirements for mortgage origination and servicing activities, as well as other lending activities.

The Standardized Approach Proposal would change risk weights in the standardized approach across multiple exposure categories. Most significantly, banking organizations would assign a risk weight to a residential real estate exposure based on the exposure’s loan-to-value (“LTV”) ratio, without considering private mortgage insurance, and based on whether the exposure is dependent on the cash flows generated by the real estate. Risk weights for eligible exposures would decrease over the life of the loan, as obligors make payments.

Proposed Risk Weights for Residential Mortgage Exposures That Are Not Dependent on the Cash Flows of the Real Estate

Proposed Risk Weights for Residential Mortgage Exposures That Are Dependent on the Cash Flows of the Real Estate

This framework for calculating risk-weighted assets from mortgages is more risk sensitive, but also more complex, than the regulatory capital rules’ current approach of assigning a 50 percent risk weight to most first-lien mortgages that are not 90 days or more past due.

Additionally, the Standardized Approach Proposal would also eliminate the deduction from capital for mortgage servicing assets (“MSAs”). Currently, most banking organizations must deduct from CET1 amounts of MSAs that exceed 25 percent of the organization’s CET1. Going forward, MSAs would no longer need to be deducted from capital, and instead would receive a 250 percent risk weight, consistent with the current capital treatment for MSAs that do not exceed the 25 percent deduction threshold. Collectively, these changes are intended to eliminate perceived capital-based disincentives for banking organizations to engage in mortgage origination and servicing.

The Standardized Approach Proposal would also slightly reduce the risk weights associated with corporate exposures, from 100 percent to 95 percent, and for other exposures not specifically assigned a different risk weight under the capital rules (such as unsecured personal loans, auto loans, home equity lines of credit, and credit cards) from 100 percent to 90 percent.

Other proposed revisions to the standardized approach include changes to the definitions and calculation of certain off-balance sheet exposures such as commitments and derivatives, securitizations, and credit risk mitigants. The proposal would also index for inflation various dollar-based thresholds used in the standardized approach, including the $1 million threshold for determining whether a mortgage on a non-one-to-four family property is a residential mortgage exposure, and the $50 billion threshold for applicability of Pillar 3 disclosure requirements.

3. The Standardized Approach Proposal would require regional banks to include elements of accumulated other comprehensive income (“AOCI”) in CET1 capital.

Consistent with earlier capital reform proposals that followed the regional bank failures of 2023, the Standardized Approach Proposal would eliminate the AOCI filter for Category III and IV firms. AOCI generally includes accumulated unrealized gains and losses on certain assets and liabilities, such as securities designated available-for-sale (“AFS”), that have not been included in net income but are included in equity under U.S. accounting rules.

Under the current capital regime, banking organizations with more than $700 billion in total assets must include most elements of AOCI in regulatory capital, but other organizations were given a one-time option to exclude them. The Standardized Approach Proposal would require all banking organizations with $100 billion or more in total consolidated assets to include these AOCI components in CET1 capital.

Inclusion of AOCI would cause all net unrealized gains and losses on AFS debt securities from changes in fair value – including those resulting from interest rate changes – to flow through to CET1, increasing the volatility of these firms’ capital requirements. The preamble to the Standardized Approach Proposal states that Category III and IV banking organizations “have the tools and access to capital markets” to manage the volatility, and that recognizing elements of AOCI better aligns regulatory capital with a banking organization’s “point-in-time loss absorbing capacity.”

The proposal would establish a five-year phase-in period for an organization’s AOCI adjustment amount to avoid an immediate material increase in capital requirements. The five-year phase-in is longer than the three-year transition period initially proposed in 2023.

4. The Basel III Endgame Proposal would allow regional, mid-sized, and community banks to opt into the expanded risk-based approach (“ERBA”) that has been proposed for the largest banks; opting in could reduce capital requirements for some of these smaller banks, at the cost of more complexity.

A central feature of the Basel III Endgame Proposal is its elimination of the existing requirement that U.S. G-SIBs and Category II firms calculate risk-based capital ratios under two regimes: the U.S. standardized approach and advanced approaches, which rely on firms’ internal models. Under the proposal, these firms would calculate risk weighted assets under only one formula, ERBA, which largely standardizes risk-weighting methodologies but is much more granular than the standardized approach. ERBA includes a risk-weighting framework not only for credit risk, but also operational risk and market risk.[2]

All banking organizations subject to the regulatory capital rules would be permitted to adopt ERBA. The election would become effective 12 months after the date on which the organization provides notice to its primary federal supervisor. Firms opting into the regime would be subject to ERBA’s risk weighting requirements for credit, operational, and market risk; the definition of capital that applies to U.S. G-SIBs and Category II firms, including the requirement to reflect AOCI in regulatory capital; and would also need to apply the more stringent capital deduction framework that applies to those entities. While most banking organizations would experience an increase in capital requirements from opting in to ERBA, some would experience a decrease. The agencies estimate that about one-third of banking organizations with less than $100 billion in assets would see reductions in capital requirements between 5 and 10 percent if they opted into ERBA, with a “small number” seeing reductions greater than 10 percent. Three Category III or IV holding companies would see a reduction in capital requirements (of 3 to 7 percent) if they elect into ERBA. Nevertheless, aspects of ERBA – including the requirement to include AOCI in capital, and the need to comply with more complex calculation methodologies – may dissuade many smaller banking organizations from voluntarily opting in.

5. The proposals would have a limited, but potentially positive impact on capital requirements for banks using the community bank leverage ratio (“CBLR”).

The agencies’ proposals largely do not apply to community banks that have elected to comply with the CBLR in lieu of risk-based capital requirements. However, the Standardized Approach Proposal would remove the threshold-based deduction for MSAs for all banking organizations and replace it with the 250 percent risk weight, and this change could increase the amount of some community banks’ Tier 1 capital, which is the numerator of the CBLR.

The agencies separately proposed in November 2025 to decrease the CBLR requirement from 9 percent to 8 percent. That change, coupled with the greater complexity of calculating standardized approach risk-weighted assets under the Standardized Approach Proposal, could make the CBLR an increasingly attractive option for banks with less than $10 billion in assets.

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For more information about the three capital proposals, please contact the members of Covington’s Financial Services practice.