Wall Street’s campaign to reshape the final U.S. implementation of Basel banking rules has gained fresh momentum. Several leading financial industry groups have recently urged regulators to revise the market-risk portion of the Basel Endgame framework, warning that the current approach could unintentionally weaken liquidity in the U.S. Treasury market. The news was first reported by the Financial Times.

The latest appeal was made by the International Swaps and Derivatives Association, the Securities Industry and Financial Markets Association, and the Institute of International Finance.

In a joint letter to the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, these organizations argued that parts of the proposal do not accurately capture the underlying economic risks associated with Treasury and repo trading.

Banking groups said that the existing framework could increase capital requirements tied to certain trading activities by 30% to 89%. They believe that these higher requirements may discourage banks from providing liquidity in one of the world's most important fixed-income markets.

Treasury Clearing Rules Add to Concerns

A key issue centers on the upcoming transition to mandatory central clearing for Treasury securities and repurchase agreements. Central clearing is intended to improve market stability and lower collateral demands for market participants.

However, banks contend that the Basel proposals would simultaneously raise capital charges linked to counterparty credit risks, offsetting much of the benefits gained from lower margin requirements.

Industry representatives have cautioned that if these concerns remain unresolved, banks could scale back their involvement in Treasury market-making activities, potentially reducing trading depth and increasing volatility during periods of stress.

Regulators Have Already Softened Their Approach

The current debate follows a significant shift in the regulatory stance earlier this year. In March, the Federal Reserve unveiled revised Basel Endgame proposals that, when combined with other regulatory adjustments, are expected to reduce capital requirements for the largest U.S. lenders like JPMorgan (JPM Quick QuoteJPM - Free Report) and Bank of America (BAC Quick QuoteBAC - Free Report) by 4.8%.

This marked a substantial departure from earlier plans that were projected to raise capital levels meaningfully. The changes were viewed as a major victory for the banking industry, with Goldman Sachs’ (GS Quick QuoteGS - Free Report) chief executive, David Solomon, stating that he was encouraged by the Fed's updated position.

Despite these concessions, banks are pressing regulators for additional modifications, particularly regarding the Fundamental Review of the Trading Book, the section governing market-risk calculations.

How Could Banks Be Affected?

The above-mentioned banks like JPM, Goldman Sachs and BAC have the most at stake as these are trading-oriented institutions. These firms play an important role in Treasury market intermediation and maintain sizable fixed-income trading operations.

If regulators further ease the Basel market-risk rules, these banks could benefit from lower capital consumption, improved trading economics and greater flexibility to deploy balance sheets in Treasury and repo markets.

Conversely, retaining the existing proposal may require them to hold more capital against trading exposures, potentially reducing profitability in these businesses.