The House Financial Services Committee convened on April 28 to review proposals from the federal banking agencies to implement Basel III capital rules for globally-systemically important banks (G-SIBs), as well as other revisions to federal capital standards with sweeping implications to the financial framework.
Five representatives from the financial services sector were invited to testify during the hearing on the cumulative impact of capital requirements across the regulatory framework.
The hearing, titled, “Prioritizing Main Street: Evaluating the Impact of Capital Proposals on Economic Growth and American Communities,” featured commentary from Mortgage Bankers Association (MBA) President and CEO Bob Broeksmit, Bank Policy Institute President and CEO Greg Baer, Davis Polk & Wardwell LLP Partner Luigi De Ghenghi, MRV Associates Managing Principal Mayra Rodriguez Valladares and Reginald Griffith, Global Head of Regulatory Compliance, Louis Dreyfus Co., on behalf of the Commodity Markets Council.
Broeksmit focused his comments on the real-world impact that bank capital rules can have on the real estate finance sector and the borrowers it serves. Specifically, he addressed their impact on various types of housing financing, mortgage servicing rights (MSAs) and warehouse lending.
Compared to the Basel III Endgame proposal issued in July 2023, Broeksmit said the revised version appeared to pose less risk of disrupting housing markets and better reflected actual risk.
“First, let me say clearly: the agencies have listened,” he said in his prepared remarks. “This new proposal is meaningfully better than the current bank capital framework and the proposed revisions advanced in 2023 that would have caused serious disruption to both residential and commercial real estate markets.”
Additionally, Broeksmit noted MBA’s support for the proposal’s provision that would reduce the MSA risk weight back to 100 percent and eliminate the cap on MSAs that can be included in Tier 1 capital.
“The value of a servicing right is a direct input into mortgage pricing. When banks are active and consistent buyers of servicing, that competition drives the value of the MSA – and every increase in servicing value translates directly into lower costs for the borrower at origination,” Broeksmit said. “A 25-basis point increase in servicing value is a 25-basis point reduction in closing costs – that's $1,000 in savings on a $400,000 loan. It's not abstract. It goes right back into the borrower's pocket.”
He also explained how more consistent rules around warehouse loans, which provide a form of short-term liquidity for mortgage lenders funding home loans for borrowers, could help make lending more efficient and support mortgage availability.
“Here's the thing that defies logic: if a mortgage company fails to repay, the bank takes possession of the underlying mortgage note. At that point, the bank holds a whole loan – which carries a 50 percent risk weight,” Broeksmit said. “I'll say that again: under the current framework, the capital requirement is cut in half if the bank's counterparty defaults. That is the only asset class I'm aware of where the bank is in a better capital position after its customer fails.”
Noting that banks play a major role in community development projects and rental housing, Broeksmit said adjusting rules to reduce capital charges in favor of those that reflect actual loan performance could help increase investment in these areas.
“Banks are essential to this market – accounting for 38 percent of all commercial and multifamily mortgage debt outstanding,” he said. “And these loans are important to banks – being some of the best performing loans on bank balance sheets in recent decades. Regrettably, high capital charges have kept banks from playing their appropriate role in this market.”
Broeksmit concluded by noting MBA’s support for urging appropriate capital relief to essential community investment and rental housing tools, including multifamily loans and Low-Income Housing Tax Credit investments.
Baer also praised the agencies for making what he believed were meaningful improvements compared to their previous capital proposals by focusing more precisely on tangible risk factors and increased transparency.
“Contemporaneous finalization of these three proposals would remove almost a decade of uncertainty about Basel implementation in the United States and lift a veil of secrecy from the Federal Reserve’s stress test,” Baer said in prepared remarks. “Investors will be able to know what a bank’s capital requirement is and project with confidence what it will be in the future – just like investors in any other type of company.”
Overall, Baer said he supports the direction of the proposals but urged refinements to better align capital with actual risk, reduce overlap and avoid harming economic growth and financial intermediation.
“These proposals reflect a new and cogent approach to capital regulation,” he said. “The agencies focus on risk, assess it honestly and asset-by-asset and show their work. They have conducted detailed economic analysis. The agencies also allow for public comment and therefore the potential for further improvements in the proposal. The result will be a capital regime that better reflects risk and allows bank capital to be allocated more efficiently, with substantial benefits for lending and market intermediation and thus for U.S. economic growth.”
While the current capital framework is intended to ensure resilience in the banking system, he contended that the risks banks present to the overall framework often is overstated due to the treatment of certain categories of risk – credit, market and operational – as fully correlated and by layering overlapping requirements.