Coverage: weekly note · Information to 23 March 2026
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TGB Weekly Research Note · 23 March 2026
Lower funding costs lifted US bank margins in late 2025, but central banks paused in March as the war in the Middle East lifted energy prices, while Basel dates are fixed in Europe, the US has proposed lighter capital rules and AI adoption is running ahead of governance.
The desk view
Falling funding costs helped US banks in late 2025: the industry's net interest margin reached 3.39% in the fourth quarter, the highest since 2019, as funding costs fell faster than asset yields. The war in the Middle East has since paused easing: the Federal Reserve, the ECB and the Bank of England all held rates in March 2026, and the Reserve Bank of Australia raised. On capital, US regulators proposed on 19 March 2026 to complete Basel III and revise other capital rules, a package that Federal Reserve staff estimate would cut the largest banks' CET1 requirements by 4.8% including stress-test changes, while the UK has set 1 January 2027 for Basel 3.1 and the EU the same date for the FRTB. On AI, more than 85% of large ECB-supervised banks already use it, and supervisors are now focused on governance and third-party concentration. Our view is that these three themes need to be planned together rather than separately.
Lower rates, but the easing phase has paused
The March round of central bank decisions showed that easing has paused rather than continued. On 18 March 2026 the Federal Open Market Committee held the federal funds target range at 3.50–3.75%, calling the implications of developments in the Middle East uncertain. The median projection still put the funds rate at 3.4% at the end of 2026, unchanged from December, but the median for 2026 PCE inflation rose to 2.7% from 2.4%.
In the euro area the deposit facility rate was cut to 2.00% with effect from 11 June 2025, and on 19 March 2026 the Governing Council left it unchanged at that level, saying the war in the Middle East had made the outlook significantly more uncertain. ECB staff now see inflation averaging 2.6% in 2026 and growth of 0.9%. The Bank of England held Bank Rate at 3.75% on 18 March 2026, with Brent crude above $100 per barrel, around 60% higher than at the time of its February Report. The Reserve Bank of Australia raised its cash rate target by 25bp to 4.10% on 17 March 2026.
For banks, the lower-rate phase has so far been profitable. The FDIC reported that the US industry's net interest margin rose 5bp in the fourth quarter of 2025 to 3.39%, the highest level since 2019, as the cost of funds fell more than asset yields. Full-year 2025 net income was $295.6 billion, up 10.2%, and return on assets rose 8bp to 1.20%. The risk for 2026 is that much of this funding-cost relief has already been captured, while an energy-driven inflation shock delays further cuts.
Basel implementation: fixed dates in Europe, a lighter US proposal
The final Basel III package now has fixed dates in the EU and the UK and a fresh proposal in the US, and each jurisdiction is implementing it on its own terms. In the EU most Basel III requirements entered into force on 1 January 2025, while on 12 June 2025 the Commission adopted a delegated act postponing the Fundamental Review of the Trading Book (FRTB) by a further year, to 1 January 2027. The PRA published final Basel 3.1 rules on 20 January 2026; they take effect on 1 January 2027, with the internal model approach for market risk following on 1 January 2028.
On 19 March 2026 the Federal Reserve, the FDIC and the OCC proposed implementing the final components of Basel III for the largest banks, alongside a revised standardised approach, while the Federal Reserve alone proposed a revised calculation of the GSIB surcharge; comments on all three are due by 18 June 2026. Federal Reserve staff estimate that the Basel III proposal alone would raise aggregate CET1 requirements of Category I and II firms by 1.4%, while the GSIB surcharge proposal would cut them by 3.8%, a net fall of 2.4%. Including proposed stress-testing changes the estimated reduction is 4.8%, and the standardised approach proposal would cut requirements by 3.0% for Category III and IV firms and by 7.8% for smaller banks. In the US, the package as a whole is therefore set to release capital rather than absorb it, while in Europe the open question is whether market-risk rules change again before the FRTB date arrives.
Policy rates and Basel III timetables, March 2026
| Jurisdiction | Policy rate | March decision | Basel III final package |
|---|---|---|---|
| United States | 3.50–3.75% | Held, 18 March | Proposed 19 March 2026; comments by 18 June 2026 |
| Euro area / EU | 2.00% (deposit rate) | Held, 19 March | Most rules from 1 January 2025; FRTB from 1 January 2027 |
| United Kingdom | 3.75% | Held, 18 March | From 1 January 2027; market-risk internal models from 1 January 2028 |
Source: Federal Reserve Board, FOMC statement, 18 March 2026; Federal Reserve Board, FDIC and OCC, capital framework proposals press release, 19 March 2026; ECB, Monetary policy decisions, 5 June 2025; ECB, Monetary policy decisions, 19 March 2026; ECB, Monetary policy statement, 19 March 2026; European Commission, FRTB postponement press release, 12 June 2025; Bank of England, Monetary Policy Summary, March 2026, 19 March 2026; PRA, PS1/26, Basel 3.1 final rules, 20 January 2026.
AI at scale: adoption is ahead of governance
Supervisory data show that AI is now mainstream in large banks. ECB Banking Supervision's annual data collection shows that more than 85% of large banks under European supervision already use AI in some form, with adoption rising each year. In the UK, the 2024 Bank of England and FCA survey found 75% of firms already using AI and a further 10% planning to do so within three years.
The supervisory concern is governance and dependency rather than adoption itself. ECB Banking Supervision said governance remains uneven, and that banks need clear accountability for AI-driven decisions, effective senior management oversight and robust challenge mechanisms. In the UK survey, 46% of firms reported only partial understanding of the AI technologies they use, against 34% reporting complete understanding. Concentration is the second issue: in the UK survey the top three third-party providers accounted for 73% of reported cloud providers, 44% of model providers and 33% of data providers, and the ECB has noted that generative AI is often sourced from a small number of major providers and relies heavily on cloud infrastructure. Meanwhile, on 19 November 2025 the European Commission proposed that the AI Act's high-risk rules apply only once standards and support tools are in place, giving firms up to 16 months to comply. For banks, scaling AI in 2026 is therefore as much a governance and third-party-risk programme as a technology one.
Why the three themes belong in one plan
With further cuts delayed, revenue growth this year may depend more on volumes and fees than on funding-cost relief. Capital released by the US proposals, if finalised, would give large banks room to fund lending, technology or distributions, while European and UK banks work to a fixed market-risk timetable. Our view is that the banks best placed this year will treat the rate plateau, the new capital rules and AI governance as one planning exercise rather than three.
What to watch
- 18 June 2026: comment deadline for the three US capital proposals.
- 1 January 2027: Basel 3.1 takes effect in the UK and the FRTB applies in the EU.
- 1 January 2028: the PRA's internal model approach for market risk takes effect.
Primary sources: ECB, Monetary policy decisions, 5 June 2025; Federal Reserve Board, FDIC and OCC, capital framework proposals press release, 19 March 2026; ECB Banking Supervision, speech on AI adoption in banking, 24 February 2026; FDIC, Quarterly Banking Profile, fourth quarter 2025, 24 February 2026; ECB, Monetary policy statement, 19 March 2026; Bank of England, Monetary Policy Summary, March 2026, 19 March 2026; PRA, PS1/26, Basel 3.1 final rules, 20 January 2026; European Commission, FRTB postponement press release, 12 June 2025; Federal Reserve Board, FOMC statement, 18 March 2026; Federal Reserve Board, staff memo on capital proposals, 19 March 2026; Reserve Bank of Australia, Monetary policy decision, 17 March 2026; Federal Reserve Board, Summary of Economic Projections, 18 March 2026; ECB, Monetary policy decisions, 19 March 2026; Bank of England and FCA, AI in UK financial services 2024, 21 November 2024; European Commission, digital omnibus news article, 19 November 2025.