EU to Delay Banking Reform Amid US Capital Requirements Cuts | FT

European regulators are preparing to soften the impact of new global banking rules, a move prompted by concerns that lenders in the European Union could be placed at a competitive disadvantage following recent actions in the United States. The European Commission intends to temporarily shield banks from the full effect of the Fundamental Review of the Trading Book (FRTB), a key component of the Basel III framework, according to two officials with knowledge of the plans.

The FRTB overhaul aims to create a more risk-sensitive system for trading activities, replacing older models with stricter rules for measuring potential losses and allocating capital reserves. The European Banking Authority (EBA) estimates that implementing FRTB would, on average, increase market risk capital requirements by approximately 30%, with some banks potentially facing increases of up to 80%.

Leveling the Playing Field

Brussels’ proposed solution involves introducing a temporary multiplier that would negate the increase in capital requirements for banks’ trading activities for up to three years. This intervention comes as regulators grapple with differing implementation timelines across major jurisdictions. The UK, for example, delayed its own implementation of FRTB’s internal models framework until January 2028, citing the necessitate for greater international alignment.

The catalyst for the EU’s move was a recent decision by the US Federal Reserve to implement the “Basel Endgame” in a way that would “decrease the requirements by a small amount” for the largest American banks, including JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley. This raised concerns within the EU that European banks could face disproportionately higher capital charges if the EU proceeded with full FRTB implementation.

Basel III and the FRTB: A Deeper Look

The Basel III framework, developed by the Basel Committee on Banking Supervision, represents a set of international banking regulations designed to enhance banks’ ability to absorb shocks and manage liquidity risks. The FRTB, a significant component of Basel III, specifically addresses shortcomings in the previous regulatory regime and weaknesses in risk measurement for trading book activities. As outlined by the Association for Financial Markets in Europe (AFME), the FRTB utilizes two primary models for calculating capital requirements: the standardized approach (SA) and the internal model-based approach (IMA).

The implementation of Basel III has been staggered. With the exception of the FRTB, all Basel III requirements were in place as of January 1, 2025, demonstrating the EU’s initial commitment to timely adoption of international standards. However, the complexity and potential capital impact of the FRTB have led to repeated delays and ongoing debate.

Impact on EU Banks and the Broader Economy

The delay in FRTB implementation is expected to provide a temporary reprieve for EU banks, allowing them more time to adapt to the new rules and potentially mitigate negative capital effects. This is particularly critical given the intense competition within the banking sector, where maintaining a level playing field is considered a high priority. The Commission launched a targeted consultation, running until January 6, 2026, to explore policy options for mitigating these capital effects for three years, ending in 2029.

However, the move isn’t without its critics. Some argue that delaying the implementation of FRTB could undermine the international framework established in the wake of the 2008 financial crisis, potentially weakening the resilience of the global banking system. The concern is that a fragmented approach to regulation could create opportunities for regulatory arbitrage, where banks seek out jurisdictions with the least stringent rules.

Competitive Pressures and Regulatory Divergence

The divergence in regulatory timelines and approaches between the US, UK, and EU highlights the challenges of implementing complex international standards. The US approach, characterized by a slight easing of requirements for its largest banks, contrasts sharply with the EU’s initial commitment to full FRTB implementation. This difference underscores the political and economic pressures facing regulators in each jurisdiction.

The EU’s decision too comes ahead of a broader review of EU banking regulation, expected later this year. This review is likely to focus on reducing regulatory burdens and enhancing the competitiveness of EU banks, responding to demands from both lenders and politicians. The Commission’s willingness to delay FRTB implementation signals a growing recognition of the need to balance regulatory rigor with the need to support the EU banking sector.

What’s Next: A Procedural Roadmap

Following the conclusion of the targeted consultation on January 6, 2026, the European Commission is expected to adopt legislation after Easter to neutralize the short-term impact of FRTB. This legislation will likely take the form of delegated acts, which are legally binding acts that supplement existing legislation. The Commission will then work with the European Parliament and Council to ensure the legislation is properly implemented across the EU member states. The three-year period of mitigated capital requirements will allow banks to prepare for the full implementation of FRTB, while regulators continue to monitor developments in other major jurisdictions. The ongoing review of EU banking regulation, anticipated later in 2026, will further shape the future regulatory landscape for the sector.