Basel III Divergence May Push Trading Into Less-Regulated Entities

A Standard Chartered executive warned at the 2026 International Swaps and Derivatives Association (Isda) Annual General Meeting that divergent implementations of Basel III capital rules are risking a migration of trading activity from regulated banks to less-regulated entities.

Speaking at the event, the executive urged regulators in the United Kingdom and the European Union to adopt a more commercial approach to the rules, mirroring the framework being utilized in the United States.

The warning centers on the finalization of the Basel III standards, specifically the Fundamental Review of the Trading Book (FRTB). These rules determine how banks calculate the risk of their trading portfolios and, how much capital they must hold as a buffer against potential losses.

The Risk of Shadow Banking

The primary concern raised during the April 2026 meeting is that if capital requirements become prohibitively expensive for regulated banks, trading volume will shift toward the shadow banking sector. This includes non-bank financial intermediaries such as hedge funds and private credit providers, which do not face the same stringent capital mandates as traditional banks.

This shift could potentially decrease overall financial stability by moving systemic risk into areas of the market that lack the same level of regulatory oversight and transparency as those governed by the Basel Committee on Banking Supervision (BCBS).

Divergence in Global Implementation

While Basel III provides a global blueprint, national regulators often adapt the rules to fit their local markets. Standard Chartered indicated that the U.S. Approach to these regulations is more aligned with the practicalities of commercial trading.

The executive argued that if the UK and EU maintain a more rigid interpretation of the rules, they may create a competitive disadvantage for their domestic banks. This divergence complicates operations for global institutions that must navigate different capital calculations across multiple jurisdictions.

The Impact of Non-Modellable Risk Factors

A central point of contention in the FRTB framework is the treatment of non-modellable risk factors (NMRFs). These are risk factors for which there is insufficient price data to create a reliable statistical model.

Under the current Basel III guidelines, NMRFs are subject to a separate, often higher, capital charge. This means banks must set aside more capital for assets that are less liquid or have less transparent pricing, which can make certain trading activities economically unviable for regulated banks.

The call for a commercial approach suggests that regulators should find ways to reduce the capital burden associated with NMRFs to ensure that banks can continue to provide liquidity to these markets without facing excessive costs.

Regulatory Context

The Basel III framework was developed by the BCBS to strengthen the regulation, supervision, and risk management of the banking sector following the 2008 financial crisis. The current phase, often referred to as the Basel III Endgame, focuses on reducing the variability in how banks calculate risk-weighted assets.

The debate over the FRTB and NMRFs reflects a broader tension between the goal of ensuring banks are sufficiently capitalized and the goal of maintaining the efficiency of global capital markets.