Basel 3.1

The Weaponisation of Risk

If a bank were to fail, you would probably expect it to be due to poor decisions — lending to the wrong people, or investing in assets which went sour.

What you would likely not suspect is that a committee in Switzerland had quietly adjusted numbers in a spreadsheet, and that this adjustment made your bank’s existing assets suddenly require far more capital.

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'It’s the central banks, stupid'

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Under banking rules coming into force in January 2027¹, a single coordinating body — the Basel Committee on Banking Supervision² — will have effective control over which assets are expensive for banks to hold and which are cheap. And since regulators already know exactly what sits on each bank’s balance sheet, they know precisely which institutions will be hit the hardest.

No public intervention, no headline, no Parliamentary debate. Just a technical recalibration that happens to make one bank’s position untenable while leaving its competitors unscathed.

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How Capital Requirements Work

Banks must hold capital against the possibility that their loans and investments go bad. The riskier the asset, the more capital required. In the past, large banks have used their own internal models to make this assessment — examining their portfolios, considering default rates, factoring in underwriting quality, and reaching their own conclusions about how much capital was appropriate.

Regulators supposedly grew concerned that banks were gaming these models to minimise requirements. Basel 3.1 addresses this by mandating standardised calculations. The ‘output floor’ requires that capital requirements cannot fall below 72.5 percent of what the standardised approach would produce³. For several major asset classes, internal models have been eliminated entirely.

The standardised approach is a lookup table maintained by the Basel Committee. Commercial real estate carries one risk weight, loans to other banks carry another, corporate bonds rated BBB carry a third. These weights translate directly into capital requirements: a higher weight means the asset is more expensive to own.

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The Targeting Mechanism

Banks must report their asset compositions in granular detail through regulatory filings and stress test submissions⁴. Supervisors know precisely what each institution holds — which sectors, which geographies, which credit ratings, which counterparties.

When risk weights were determined by internal models, this knowledge had limited utility. A bank might justify heavy exposure to commercial property through arguments about underwriting quality or geographic diversification. The standardised approach eliminates this balancing. The lookup table determines the capital charge, and the lookup table is set in Basel.

Suppose the Basel Committee increases the risk weight for commercial real estate from 100 percent to 150 percent. Every bank holding commercial property now requires fifty percent more capital against those positions. But a bank with five percent exposure faces a manageable adjustment, while a bank with thirty percent exposure faces a serious problem. The same supposedly neutral recalibration affects one institution harder than another.

The affected bank must then raise expensive new capital, sell assets at distressed prices, or shrink its balance sheet. And none of this requires any announcement that a particular bank is being targeted — and no institution in Basel have to accept responsibility when outcomes turn negative.

All roads lead to Basel

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Stress Testing as Reconnaissance

The targeting potential is amplified by stress testing⁵. Regulators design hypothetical scenarios — interest rate spikes, property market corrections, sovereign debt crises — and require banks to demonstrate they could survive them. The scenarios are chosen by regulators, and the assumptions embedded within them determine which business models appear resilient and which appear fragile.

Stress testing reveals exactly which institutions are vulnerable to which pressures. This information can then inform adjustments to the standardised risk weights that determine ongoing capital requirements.

An unelected committee, operating through technical standards that few voters will ever read, now has effective capacity to determine which financial institutions thrive and which struggle.

The power to define what counts as risky is the power to decide which assets are viable to hold, and therefore which institutions should be even allowed to exist.

1. https://www.bankofengland.co.uk/prudential-regulation/publication/2026/january/implementation-of-the-basel-3-1-final-rules-policy-statement

2. https://www.bis.org/bcbs/index.htm

3. https://www.bis.org/bcbs/publ/d424.pdf

4. https://www.foreignbanks.org.uk/the-irresistible-approach-of-granular-data-reporting-what-will-it-mean-for-uk-based-banking-entities/

5. https://www.bankofengland.co.uk/stress-testing/2025/key-elements-bank-capital