CFA Institute Systemic Risk Council Renews “Too Big to Fail” Concerns Over Proposed Basel III Rules

The CFA Institute Systemic Risk Council (SRC), an independent, nonpartisan group of financial experts and former policymakers, has issued a public comment letter warning about recent proposals by U.S. banking regulators to implement the final phase of the Basel III international capital standards.

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Basel III is a global framework developed after the 2008 global financial crisis (GFC) to ensure banks hold enough capital to absorb losses and continue lending during economic stress. U.S. regulators have now released the latest set of proposals under the effort known as the Basel Endgame, aimed at modernizing and simplifying these rules while aligning them with international standards.

SRC Cochairs Simon Johnson and Erkki Liikanen, signatories to the comment letter, noted: “The SRC acknowledges that the proposals contain constructive elements and that it is important to complete the Basel reforms. Unfortunately, the proposals exacerbate systemic risk vulnerabilities and intentionally ignore certain Dodd-Frank Act requirements designed to prevent taxpayer funded bailouts.”

The SRC’s primary concern is that U.S. regulators have already weakened capital adequacy safeguards several times ahead of this new round of Basel III changes. In particular, the SRC warns that previous downward adjustments to leverage ratios and loss-absorbing capacity in the past two years have already left the largest US banks more vulnerable during periods of market stress. Unless the new Basel III reforms are adjusted, the risks of “Too Big To Fail” will deepen further.

In its comments, the SRC urges policymakers to ensure that any revisions are firmly grounded in current data and rigorous economic impact analysis, with clear evidence that changes will not undermine financial stability. Several justifications in the Proposals for easing capital requirements are not supported by the analysis presented. For example, regulators claim that existing rules significantly hinder liquidity in U.S. Treasury markets or unnecessarily restrict bank lending yet provide little evidence to support those conclusions. Transparency and public accountability are essential to building confidence in the regulatory framework.

The SRC also highlights the importance of maintaining strong, consistent standards across the largest, systemically important banks known as GSIBs. It notes that the role of these major financial institutions—and their inter-connectedness—means that even small reductions in capital buffers can have outsized consequences for the economy.

To address these concerns, the SRC comment letter urges U.S. regulators to take several key steps as they implement the Basel III framework in the U.S., including calling on the regulators to avoid weakening core capital requirements and instead maintain or strengthen existing protections, especially for GSIBs and other large, complex banks. The SRC also recommends that regulators consider the additional reductions in capital resulting from the Proposals in the full context of the many other reductions in bank capital implemented in recent months. All of these reductions must be assessed in the aggregate to have more clarity on the overall impact on bank resilience and reduce the risk of unintended consequences.

Finally, the SRC encourages regulators to remain aligned with international Basel standards while preserving strong U.S.-specific safeguards, ensuring that U.S. banks remain both competitive and resilient. More resilient and trusted banking institutions retain a stronger competitive advantage.

“The lesson of the financial crisis is clear: strong capital standards are the foundation of a stable financial system,” noted Johnson and Liikanen. “We should not roll back safeguards without compelling evidence that doing so will serve the broader public interest.”

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