New Proposal: Category III and IV Banks Opt-Out With Intragroup Trade Penalties

U.S. Federal banking regulators have introduced a new proposal that allows certain foreign banks to avoid operational risk capital charges under the Basel III framework, provided they meet specific category criteria. The proposal, issued on March 19, 2026, by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), offers an opt-out for banking organizations classified as Category III and IV.

While the measure provides relief for these smaller categories of banking organizations, the regulators have included a caveat for internal operations. The proposal stipulates that intragroup trades will be penalized, preventing banks from using internal transfers to circumvent the capital requirements.

Shift in Capital Framework

The March 19, 2026, package of proposed rules represents a second attempt by U.S. Regulators to implement the standards originally published by the Basel Committee on Banking Supervision in December 2017 and January 2019. The updated framework aims to streamline and ease various capital requirements for the nation’s largest financial institutions.

The reforms specifically target the risk-based regulatory capital requirements for Category I and II banking organizations, while also altering the risk weights applied to credit exposures for other banking organizations. This shift is designed to reduce the regulatory burden on the banking industry at large, potentially freeing up capital for lending, dividends, and share buybacks.

Operational Risk and Foreign Banks

The decision to allow Category III and IV banks to opt out of the operational risk regime addresses long-standing concerns regarding the impact of U.S. Capital rules on foreign subsidiaries. Foreign banks had previously expressed concerns that the original Basel III endgame proposals were drafted primarily with U.S.-headquartered banks in mind, creating an uneven playing field for international entities operating within the United States.

By allowing these categories to swerve specific operational risk capital charges, the regulators are easing the pressure on mid-sized and smaller international banking operations. However, the penalty on intragroup trades ensures that the relief is not exploited to shift risk between affiliates without maintaining appropriate capital buffers.

Market and Regulatory Context

The move has drawn mixed reactions from industry observers and advocacy groups. Some analysts suggest the easing of these rules could create transatlantic fault lines, as regulators in the United Kingdom and the European Union may find themselves balancing financial prudence against the need to remain competitive with a more lenient U.S. Regime.

Critics of the proposal argue that reducing capital requirements could increase systemic risk. Phillip Basil, a director at Better Markets, stated that the proposal really misses the mark in terms of what its original intent was.

The proposal is part of a broader effort to refine the “tailoring rule,” which determines the level of supervision and capital requirements based on a bank’s size, risk profile, and complexity. This includes adjustments to the capital floor and the methods for calculating the capital surcharge for Global Systemically Important Banks (G-SIBs).

Key Components of the Proposal

• Category III and IV Opt-Out: Allows these organizations to avoid certain operational risk capital charges.
• Intragroup Trade Penalties: Maintains strict requirements on trades between affiliated entities to prevent capital evasion.
• Revised Standardized Approach: Changes the risk weights that banking organizations apply to credit exposures.
• G-SIB Surcharge Adjustments: Modifies the calculation method for the capital surcharge applied to the largest global banks.

The regulatory changes also touch upon minimum requirements for eligible liabilities (MREL) and total loss-absorbing capacity (TLAC), as well as the management of counterparty credit risk in cross-border trading.