Federal banking regulators recently proposed rules to implement the Basel III Endgame framework. Global banking regulators developed the Basel III framework after the 2008 financial crisis to strengthen bank regulation, supervision, and risk management through a set of international standards. The final set of rules to implement the framework has been dubbed “Basel III Endgame.”

Although regulators originally planned to finalize and implement the Basel III accord by the beginning of 2023, countries have repeatedly delayed implementation while tailoring the framework to national interests and as banks and policymakers around the world increasingly embrace a more deregulatory approach.

The updated proposal follows a 2023 proposal from the Biden Administration that drew criticism for threatening to impose burdensome capital requirements on U.S. banks that could reduce lending and credit availability. Regulators argued that strengthening risk-based capital requirements for large banks would promote financial stability and resilience, but critics contended that the proposal could instead restrict banks’ lending capacity and push lending and traditional bank activity into more lightly regulated shadow banking sectors, such as private credit.

The latest proposal departs significantly from the 2023 proposal and would reduce the regulatory burden on large banks. The banking industry has applauded the recent deregulatory push, but critics warn that this approach risks weakening bank regulatory infrastructure only a few years after several major bank failures revealed ongoing gaps in bank supervision. Silicon Valley Bank’s collapse in 2023 marked the third-largest bank failure in U.S. history and required major emergency intervention. Although U.S. bank regulators largely contained the fallout and prevented contagion risks, the episode highlighted ongoing systemic risks to financial stability.

Debate over U.S. banking regulation also coincides with financial innovation and the rise of cryptocurrency, which have upended traditional financial services. The proposal comes less than a year after Congress passed the GENIUS Act, which established a baseline framework for stablecoin issuance. The GENIUS Act represented a significant regulatory breakthrough in a rapidly developing industry but left open many questions about its implementation and the future of cryptocurrency and stablecoin regulation. Federal regulators recently proposed rules to begin implementing the GENIUS Act framework, which will take effect in January 2027.

In this week’s seminar, scholars explore and offer competing views on current risks to the banking system and financial stability and identify potential regulatory vulnerabilities, including new payment systems tied to cryptocurrency.

• In a National Bureau of Economic Research working paper, Stephen Cecchetti and co-authors advocate implementation of the Basel III Endgame standards and higher U.S. capital requirements for large banks. They argue that criticisms of the 2023 proposed regulations are not supported by data and that heightened capital requirements do not reduce bank lending. The authors warn that failure to align U.S. regulations with the international Basel III standards could start a deregulatory race to the bottom that would undermine global banking stability.
• In an article in the University of Illinois Law Review, American University Washington College of Law Professor Hilary Allen explains that financial stability risks can arise from often-overlooked sources beyond the traditional banking sector, such as venture capital. Using the venture capital industry as a case study, Allen contends that speculative sectors such as cryptocurrency can pose risks when regulatory oversight is weak. She argues that effective banking regulation of emerging risks requires a more proactive, systemwide approach, including increased monitoring of risks arising from venture capital investment and more aggressive securities law enforcement against cryptocurrency activities.
• In a Stanford Law Review article that predates the GENIUS Act, Gabriel Rauterberg and Jeffrey Zhang argue that shadow banking, including stablecoin issuance, should fall under securities regulators’ oversight. Shadow banking covers a broad range of activities that resemble banking but fall outside the traditionally narrow bank regulatory perimeter and lack banking regulation. As a result, shadow banking receives significantly less regulatory oversight, creating vulnerability and instability in the financial system. The authors contend that many shadow banking activities fall within securities law’s purview and that securities regulation should promote systemic stability by working with traditional bank regulation.
• Financial regulation has not kept pace with the financial system’s rapid changes, University of Pennsylvania’s Wharton School Assistant Professor of Finance Yao Zeng asserts in the International Monetary Fund’s Finance & Development quarterly publication. Zeng frames stablecoins as innovative in form but economically familiar in function and financial vulnerability. He argues that although stablecoins promise faster, cheaper, and more accessible payments, their bank-like economic functions and lack of protections such as deposit insurance and lender-of-last-resort support create familiar risks to financial stability. Zeng proposes that regulation should depend more on function than label: if stablecoins perform bank-like monetary functions, they should provide similar safeguards.
• In a Delaware Journal of Corporate Law article, Arthur E. Wilmarth argues that the GENIUS Act institutionalizes nonbank stablecoin issuance, a practice that carries severe economic risks and lacks offsetting benefits. Wilmarth contends that nonbank stablecoin issuance undermines traditional banking and allows nonbank entities, such as tech firms, to perform bank-like functions without proper regulatory safeguards. He argues that the resulting ecosystem carries significant risks for financial stability and maintains that stablecoin issuance should be limited to FDIC-insured banks to ensure that adequate protections safeguard depositors’ money.
• In a recent article in the Quarterly Review of Economics and Finance, Roanoke College’s Zane Mullins addresses common critiques of stablecoins and pushes back against the view that stablecoins pose risks to the financial system. Mullins proposes a narrow stablecoin framework that would allow stablecoin issuers to settle payments with common central bank reserves. He argues that this framework would mitigate credit and liquidity risk by giving all stablecoin issuers similar access to a common settlement medium. Mullins contends that the framework would also address interoperability concerns, promote a level playing field among issuers, and mitigate counterparty risk.