Banking Regulations Update

Weighing You Down: The new Capital Requirements proposed under Basel III Endgame will prove onerous for Banks & Borrowers, alike. Today, I examine the Commercial Real Estate sector since this asset class is highly reliant on banks (and vulnerable) and the CRE market is contending with a huge pending maturity wall. Banks account for ~50% of the CRE debt market, representing the largest collective lender to CRE - this equates to nearly $3T in the U.S. alone. Below, I have constructed a table that very clearly states (my source from various federal documents that include: Note 20.86 on the Basel Framework (BIS) & Page 164 of September 2023 FDIC Proposed Rules notice) how a bank must measure its cash reserve requirements (CRR) for a given loan. Notice the change in risk weightings required for a given LTV. For a given loan, ~+20% higher risk weighted capital will be required that will soon be subject to this new measurement for risk. The bank lender will be required to hold additional capital for a given loan, or alternatively, simply extend less credit when writing a new loan as they apply more conservative detachment points (e.g. $50M loan vs. $100M asset value which is 50% LTV vs 80% LTV previously). If the bank does not want to increase its CRR, it must reduce the amount of credit it extends for a given asset/borrower. The delta is stark; this is a paradigm shift that will crack the door wide open for Private Credit Lenders. Banks will differentiate, take a more discerning eye when extending credit, with greater discipline going forward under Basel III Endgame. The new Basel III Endgame capital guidelines required by federal banking regulators and implemented in 2025 will break down risk-weighted assets by blending what is considered senior-secure risk v. unsecured risk (within a single unitranche loan). Regulators are confident that by imposing stricter capital requirements and more onerous stress tests when reporting liquidity, assets, operations, capital requirements, large banks (30 banks in U.S. with assets greater than $100B) will become less risky and less prone to failure. Banks are with their regulators to push back on Basel III Endgame capital charges; I am sure Banks will find a middle-ground with their regulators, but it will still result in additional and significant costs and more conservative lending practices. Private Credit firms such as Marathon Asset Management will provide a critical role in filling the void, to partner with banks and originate a plethora of investment opportunities that arise: - Mezz debt loans to fill the capital gap as banks roll loans at lower LTVs - Private Credit gaining more market share as banks reduce ABL exposure, for all ABL segments (not just CRE) - Asset Sales by banks - CRT/SRT transactions as private capital allows banks to offload risk - Private Capital & Bank Investment - Management Partnerships The current ratios vs. the proposed ratios are starkly contrasted in this table below:

"Russian importers are grappling with a new significant issue in their transactions with China. Payments in yuan bought in Russia are increasingly being rejected, causing alarm among market participants, reports The Moscow Times. Both Chinese banks and payment agents handling transfers to the East via third countries are wary of dealing with such funds. Market insiders revealed that new terminologies— "clean" and "dirty" yuan—have emerged in the cross-border payments sector since June. A "clean" yuan refers to the currency purchased abroad, whereas a "dirty" yuan is bought within Russia, whether on the stock exchange or the interbank market. Handling this "dirty" yuan has become burdensome. The number of Chinese banks willing to accept money from Russia significantly dwindled after the US imposed sanctions on the Moscow Exchange and Asian subsidiaries of major banks on 12 June. VTB Shanghai, which is also under sanctions, began facing severe issues in transferring yuan to client accounts in China. Even before, acquiring yuan within Russia was arduous due to the threat of secondary US sanctions. The bank used complex methods to replenish its yuan reserves, either through the Moscow Exchange and subsequent transfer to China via local intermediary banks or the Russian division of the Bank of China, receiving yuan from the same intermediaries. But now, this channel has shut down as both intermediaries and the Bank of China have withdrawn from the scheme. Simultaneously, operations involving "counterflows"—using incoming yuan on exporter accounts to pay for goods or swapping debt obligations to settle similar transactions—are becoming increasingly complex. The source noted that exports passing through VTB Shanghai are less than the payments for imports, aggravating the situation. Consequently, direct transfers of yuan from Russia to China, which were challenging before, have now nearly ceased entirely. "If before 12 June, around 15% of such payments were quickly and seamlessly received by Chinese counterparts, now it's approximately 5%," a source told The Moscow Times. The situation is further complicated by new issues with the only effective scheme for settling foreign trade transactions through payment agents in other jurisdictions. "In the past month, three out of five of our payment agents informed us they would only work with 'clean' yuan," disclosed an equipment supplier from China. Regarding attempts to pay directly to China in rubles, not all banks are willing to accept payments in the Russian currency. Those that do often impose exorbitant conversion rates to "clean" yuan. Even if rubles reach China, utilizing them is challenging due to low demand. "It is even harder to find suppliers willing to accept rubles, and they tend to raise prices for such payments. Therefore, it turns out to be neither quick nor cheap," added the source." From https://lnkd.in/d7WqzNMi

Russia added to the EU’s AML high-risk list: What this means in practice You’ve probably already seen the news: ↳ The European Commission added Russia to the list of high-risk third countries due to strategic deficiencies in its AML/CFT framework. I’ve decided to write a short breakdown of what this looks like in practice, especially if you work in AML. The first thing to understand is that: This is a binding decision and directly applicable to all EU regulated entities. And here’s what makes this decision interesting: 👉 Russia is not on the FATF grey or black list 👉 The UK has not taken a similar position 𝗦𝗼 𝘄𝗵𝘆 𝗱𝗶𝗱 𝘁𝗵𝗲 𝗘𝘂𝗿𝗼𝗽𝗲𝗮𝗻 𝗖𝗼𝗺𝗺𝗶𝘀𝘀𝗶𝗼𝗻 𝘁𝗮𝗸𝗲 𝘁𝗵𝗶𝘀 𝗱𝗲𝗰𝗶𝘀𝗶𝗼𝗻? Because the EU has concluded that, despite the lack of FATF or UK designation, Russia still presents a threat to the integrity of the EU financial system. If you're an AML officer at an EU-regulated institution, here’s what this update requires you to consider: 𝟭. 𝗖𝗼𝘂𝗻𝘁𝗿𝘆 𝗿𝗶𝘀𝗸 𝗮𝘀𝘀𝗲𝘀𝘀𝗺𝗲𝗻𝘁𝘀 ↳ Russia must now be treated as a high-risk third country under EU law ↳ Update internal risk scoring, matrices, and policy documents 𝟮. 𝗘𝗻𝗵𝗮𝗻𝗰𝗲𝗱 𝗱𝘂𝗲 𝗱𝗶𝗹𝗶𝗴𝗲𝗻𝗰𝗲 (𝗘𝗗𝗗) ↳ Apply EDD to Russian clients, counterparties, and beneficial owners ↳ Consider indirect links - such as offshore structures or intermediaries ↳ Retain clear documentation of your rationale and decisions 𝟯. 𝗢𝗻𝗯𝗼𝗮𝗿𝗱𝗶𝗻𝗴 𝗮𝗻𝗱 𝗞𝗬𝗖 𝗽𝗿𝗼𝗰𝗲𝘀𝘀 ↳ Russian connections should now trigger additional review steps ↳ Check whether your onboarding process can flag links to Russia properly 𝟰. 𝗧𝗿𝗮𝗻𝘀𝗮𝗰𝘁𝗶𝗼𝗻 𝗺𝗼𝗻𝗶𝘁𝗼𝗿𝗶𝗻𝗴 ↳ Revisit typologies that may involve Russia-linked flows ↳ Consider additional monitoring thresholds or alert triggers 𝟱. 𝗜𝗻𝘁𝗲𝗿𝗻𝗮𝗹 𝗰𝗼𝗺𝗺𝘂𝗻𝗶𝗰𝗮𝘁𝗶𝗼𝗻 ↳ Inform relevant teams (e.g. onboarding, legal, risk, senior management) ↳ Include this regulatory change in your compliance reporting 𝟲. 𝗚𝗼𝘃𝗲𝗿𝗻𝗮𝗻𝗰𝗲 ↳ Senior management should be informed - and may need to approve changes to customer acceptance criteria or risk appetite. Tip for leadership: Ensure there’s someone at board or senior level who can work closely with your AML team to implement such regulatory changes effectively. This is necessary to support decision-making, understand the impact, and help align risk strategy across the business. Wishing you a great week ahead!

Understanding the Imperative: Basel III and Post-Crisis Reforms The financial crisis of 2008 was a stark reminder of the interconnectedness and vulnerabilities within the international financial system. The crisis exposed significant weaknesses in the global regulatory framework, particularly under Basel II, necessitating a more robust and resilient banking system. Understanding why Basel III and other post-crisis reforms were introduced is crucial for banking professionals who are navigating these regulatory environments. Although Basel II was a significant advancement over its predecessor, it became apparent during the financial crisis that it did not go far enough in preventing the build-up of systemic risk. Basel II was heavily reliant on internal risk assessments by banks, which proved to be overly optimistic and insufficient in the face of financial distress. The framework also lacked stringent requirements for liquidity and leverage, allowing banks to operate with high leverage while maintaining insufficient liquid assets. Basel III was developed to address these shortcomings and to significantly strengthen the global capital framework. Key enhancements introduced by Basel III include: 1. Higher Capital Requirements: stricter capital requirements, increasing both the quantity and quality of capital banks must hold. This includes a higher ratio of equity to risk-weighted assets, ensuring that banks have enough capital to absorb losses during periods of financial stress. 2. Countercyclical Buffers: To prevent excessive credit growth that can lead to asset bubbles, Basel III introduced countercyclical capital buffers, requiring banks to hold additional capital during periods of high credit growth, which can be reduced when conditions worsen. 3. Leverage Ratio: Unlike Basel II, Basel III introduced a non-risk-based leverage ratio to serve as a safeguard against excessive leverage on banks' balance sheets. This measure helps ensure that banks' expansion is matched by solid capital support. 4. Liquidity Requirements: Basel III established two key liquidity ratios - the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). These ensure that financial institutions maintain sufficient high-quality liquid assets to withstand a 30-day stressed funding scenario and promote more stable funding structures. The implementation of Basel III and its ongoing updates reflect an ongoing commitment to fortifying the global banking system against future crises. These reforms have led to a more conservative banking environment where institutions must operate with higher levels of capital and stronger risk management practices. Understanding the rationale and requirements of Basel III is not just about regulation, but about appreciating the role of these reforms in fostering a more stable banking system. As the landscape continues to evolve, the insights gained from these reforms will be essential in guiding future regulatory changes.

India has officially notified the DPDP Rules 2025, triggering the operational rollout of the DPDP Act. For the banking sector, this is a defining moment. The rules now make data governance, breach reporting, consent, and security controls a regulatory obligation — not a best practice. Banks handle the most sensitive personal data in the country. With the new rules, they must strengthen security (encryption, access controls, audit logs), redesign customer consent journeys, and notify customers and the government quickly in case of a breach. Retention and deletion rules also tighten — data can’t be kept beyond its purpose without legal basis. Most large banks will now fall under the category of Significant Data Fiduciaries, bringing additional responsibilities like annual data-protection audits, DPIAs, and tighter oversight on data flows, especially cross-border. This will force banks to rethink their data architecture, vendor ecosystem, and operating model over the next 12–18 months. My view: this is not just a compliance change — it’s a trust opportunity. Banks that act early and communicate transparently will earn customer confidence and stand out in an increasingly digital financial ecosystem. The DPDP era has begun. Are we ready to lead it?

Reserve Bank of India (RBI) has taken  four measures for strengthening the resilience and competitiveness of the Indian #banks. 1. The Expected Credit Loss (ECL) framework of provisioning with prudential floors is proposed to be made applicable to all Scheduled Commercial Banks (excluding Small Finance Banks (SFBs), Payment Banks (PBs), Regional Rural Banks(RRBs)) and All India Financial Institutions (AIFIs) with effect from 1st April 2027. They will be given a glide path (till March 31, 2031) to smoothen the one-time impact of higher provisioning, if any, on their existing books. 2. Further, it is proposed to make the revised Basel III capital adequacy norms effective for commercial banks (excluding SFBs, PBs and RRBs) from 1st April 2027. 3. In furtherance of this, a draft of the Standardised Approach for Credit Risk shall be issued shortly. Under the revised approach, the proposed lower risk weights on certain segments are expected to reduce the overall capital requirements, particularly for #MSMEs and residential #realestate (including home loans). 4. It may be recalled that capital requirements for operational risk have already been finalised (in 2023) whereas the capital requirements for market risk are under finalisation after receipt of comments from the public. These measures will help align RBI guidelines with international standards adapted to our national conditions and priorities, and strengthen the capital adequacy framework for banks and AIFIs.  

The Minimum Deposit Rate (MDR) was introduced by the State Bank of Pakistan to protect retail depositors by ensuring a guaranteed minimum return on their savings. While Islamic banks were initially exempt due to their Shariah compliant profit-sharing pool mechanism, the MDR imposed fixed return requirements on conventional banks for deposits, including those from corporates and financial institutions (FIs). Conventional banks faced increasing challenges as they sought to comply with the Advance-to-Deposit Ratio (ADR) tax requirements - a policy mandating banks to maintain at least a 50% ADR ratio to avoid heavy taxes imposed by the FBR. To meet these requirements, banks lent to corporates and FIs at KIBOR-minus rates. At the same time, they were mandated to pay MDR on deposits, resulting in negative spreads, where lending rates were lower than funding costs. This setup allowed corporates to exploit an arbitrage opportunity: borrowing at discounted rates and reinvesting those funds into savings accounts, earning guaranteed MDR returns plus a spread, creating a risk-free arbitrage opportunity. This inefficiency undermined the banks' profitability and called for regulatory intervention. To address these issues and ensure equitable treatment across the banking sector, the SBP introduced key changes: MDR Removal for Conventional Banks: From January 1, 2025, MDR will no longer apply to deposits from corporates, FIs, and public limited companies. This allows conventional banks to negotiate market driven rates, eliminate negative spreads, and optimize profitability. MDR for Islamic Banks: Islamic banks are now required to offer a minimum return of 75% of their weighted average gross yield on savings accounts. The policy shift has injected positivity into the banking sector. Conventional banks, now freed from restrictive MDR mandates on corporate deposits, are expected to see improved profitability. Banking stocks have rallied, reflecting investor confidence in the sector’s stronger earnings potential. By addressing arbitrage opportunities and eliminating inefficiencies, these changes not only help banks optimize profitability but also create a more stable environment for both depositors and investors. How do you see these changes impacting the broader financial landscape in the coming years? #BankingSector #FinancialRegulations #MDR #StateBankofPakistan #ADR #BankingProfitability #FinancialInstitutions #PakistanEconomy

Banking regulation is shifting — fast. Here's the latest on what's happening at the FDIC, and why it matters. 🏦 Mergers are speeding up: The FDIC is making it easier for banks to merge, rescinding the controversial 2024 policy. Already, January saw $678 million in deals, up from $567 million last year. 📱 Fintechs may get a boost: The FDIC is softening its stance on deposit insurance for industrial banks, an avenue for fintech to enter banking. From 2010-2023, only five banks formed annually, far below the 144 per year from 2000-2007. 🛑 Regulations are rolling back: Rules on brokered deposits, deposit insurance disclosures, and fintech partnerships are being paused or delayed, some until 2026. What really matters here is the potential for a more competitive banking sector. The FDIC’s moves could lead to more fintech-bank partnerships, more bank M&A activity, and more new entrants. The growth of fintech infrastructure providers (Banking-as-a-Service) is enabling more non-financial firms to offer banking services. This trend, combined with relaxed regulations, could increase competition among traditional banks, FinTechs, and tech giants. Or, it could all backfire. Less oversight could mean riskier banking practices, leading to instability. A looser approach to fintech partnerships might encourage regulatory arbitrage, where firms exploit gaps rather than innovate responsibly. The last time we saw an explosion in new banks? The early 2000s — and we know how that ended. Will a looser FDIC fuel competition or chaos? We shall soon find out.

As we kick off the new year, we’ve reached a major turning point: the final set of Basel III requirements is now applicable to all EU banks. The implementation of the Basel III international standards in the EU is a major milestone, as it finalises the prudential regulatory reform of the banking sector initiated in response to the 2008 global financial crisis. This reform provides an important additional layer of resilience to the EU banking system. We hope to see similar progress soon in other jurisdictions, notably in the US, which will be crucial in ensuring financial stability and a level-playing field globally, which are both necessary conditions for the competitiveness of the EU economy.   The journey towards the EU’s Basel III implementation is not over yet and further work is needed in two key areas: first, the adoption of the regulatory and implementing technical standards that the European Banking Authority (EBA) was mandated to draft to operationalise the newly introduced requirements and, second, deciding on the way forward as regards the market risk aspects that were postponed by one year.   Work on the technical standards linked to the Basel III implementation in the EU is progressing well. The EBA has started to deliver on its mandates (full list at the link below), launching public consultations on several draft technical standards, gathering valuable feedback and comments from stakeholders. Two key implementing technical standards on reporting and disclosure by banks were published a few days ago and other technical standards that are essential for the functioning of the new framework have been prioritised and are forthcoming.   The date of application of the market risk prudential requirements under Basel III (the “Fundamental Review of the Trading Book”, FRTB) has been postponed by one year in the EU, by means of a delegated act, adopted by the Commission in July 2024 and endorsed by co-legislators in October 2024. However, the underlying concerns that prompted the Commission decision, such as issues in other major jurisdictions with the implementation of the Basel III standards, which could create an international unlevel playing field for banks in their trading activities, unfortunately are still there. The Commission will continue its monitoring of the international implementation of Basel and will engage with the co-legislators, the EBA and other stakeholders before deciding on the next step for the FRTB. This will be a priority for the Commission in 2025.   But today we should focus on the major achievement that the implementation of the Basel III standards represents for the EU. It ensures that the EU banking sector remains resilient and effectively supervised, ready to meet the new challenges we face. The stability of the EU banking system is the bedrock of the EU’s competitiveness. 📃 More info on the EBA’s roadmap on the implementation of the banking package 👇

🇪🇺 ( Jan 26) EBI - European Banking Institute Report on Simplification of EU Financial Law 📑The report, prepared by the European Banking Institute, analyses the growing systemic complexity of EU financial regulation across sectors and places it within current EU policy debates such as the Savings and Investments Union, the Letta and Draghi reports, and the European Commission’s simplification agenda. 📑It finds that EU financial regulation has become excessively complex due to cumulative legislative and supervisory layers, overlapping mandates, fragmented definitions, erosion of the Lamfalussy framework, frequent amendments, and divergent national implementation, which together undermine legal certainty, supervisory convergence, competitiveness, innovation, and the single market. 🔑Key drivers of complexity: ⭐️Institutional fragmentation and uneven supervisory centralisation across sectors. ⭐️Expansion and “hardening” of technical rules and soft law. ⭐️Inconsistent concepts and sectoral silos despite integrated business models. ⭐️Repeated transposition of evolving international standards. ⭐️Overlaps from digital finance, data governance, #AML / #CFT, and sustainability #ESG regulation. 📑The report stresses that simplification is not deregulation but a methodological and architectural exercise aimed at preserving financial stability and core regulatory objectives while improving coherence, clarity, proportionality, and regulatory effectiveness. 📑It proposes restoring a clear hierarchy of regulatory sources under the Lamfalussy process, rationalising and codifying definitions and taxonomies, reducing unnecessary options and discretions, clarifying the mandates and accountability of EU agencies, moving towards more coherent supervisory structures beyond banking, and simplifying reporting through integrated systems and common data standards. 📑It concludes that without a deliberate and structured approach to simplification, further regulatory layering will weaken the effectiveness and legitimacy of EU financial law, whereas properly designed simplification is a prerequisite for sustainable regulation, competitiveness, innovation, and a well-functioning internal market. https://lnkd.in/d4QZhZ4h