S&P: Global Banks Hold Excess Capital as Basel III Rollout Remains Incomplete

Global implementation of the latest Basel III banking regulations remains unfinished across most major markets, prompting many financial institutions to maintain capital buffers well above minimum regulatory requirements as they await greater clarity on the final shape of the framework, according to a new assessment by S&P Global.

The ratings agency said banks are increasingly cautious about deploying surplus capital amid ongoing uncertainty surrounding regulatory reforms, particularly those tied to market-risk calculations and trading activities.

According to S&P Global, lenders currently face two primary options for utilizing excess capital: returning funds to shareholders through stock buybacks or channeling liquidity into higher-yield business lines, especially capital markets activities such as trading, despite the sector’s heavy capital consumption.

At the center of the regulatory overhaul is the Fundamental Review of the Trading Book (FRTB), a key Basel III reform designed to strengthen the way banks measure market risk.

The new framework replaces the traditional “Value at Risk” model with an “Expected Shortfall” approach, placing greater emphasis on extreme market losses and stress scenarios. The shift is expected to significantly alter how banks calculate risk-weighted assets across trading operations.

S&P noted that the revised methodology could either increase or reduce risk weights depending on the nature of a bank’s activities, ultimately reshaping the economics of trading businesses and influencing the composition of investment portfolios held by financial institutions.

The report also highlighted regulatory adjustments in the United States, where amendments to the Supplementary Leverage Ratio introduced in November 2025 lowered minimum capital requirements for certain banks.

The changes allowed some institutions to expand holdings of market-traded assets, potentially boosting trading revenues during periods of elevated market activity. However, S&P warned that the move could also amplify balance-sheet volatility and increase exposure to market shocks.

Despite renewed interest in capital markets businesses, S&P stressed that trading activities remain inherently more complex and less transparent than traditional lending operations, making risk assessment significantly more challenging.

Still, the agency said available data suggests trading-related risks have remained broadly contained in recent years, extending a post-global financial crisis trend in which banks increasingly act as intermediaries facilitating client transactions rather than engaging heavily in proprietary trading for their own accounts.