The Federal Reserve is set to relax capital requirements for large banks, a move aimed at stimulating lending across the economy, with a particular focus on revitalizing the mortgage market. This strategic adjustment seeks to streamline regulations, reduce unnecessary burdens on financial institutions, and encourage greater participation in key lending sectors.
Federal Reserve Vice Chair for Supervision Michelle Bowman announced upcoming changes to the bank regulatory capital framework, emphasizing a more internally consistent and cohesive approach. These revisions stem from a “bottom-up” rethinking of four key pillars: stress testing, the supplementary leverage ratio, Basel III risk-based capital rules, and the global systemically important bank (G-SIB) surcharge. Bowman stated that these changes aim to eliminate overlapping requirements, calibrate rules to match actual risk, and address long-standing gaps, ultimately leading to more efficient regulation and banks better positioned to support economic growth while maintaining safety and soundness.
A significant aspect of the proposed changes involves the mortgage market. The revisions will allow capital requirements for mortgages to explicitly recognize loan-to-value (LTV) ratios, meaning lower-LTV loans will attract lower capital charges, while riskier, high-LTV loans will carry more. Furthermore, banks will no longer be required to deduct mortgage servicing assets (MSAs) from regulatory capital; instead, MSAs will receive a 250% risk weight. This adjustment is intended to reduce disincentives for banks to participate in mortgage markets and service their originations, thereby addressing the trend of mortgage activity migrating to less-regulated nonbank entities over the past 15 years.
Bowman acknowledged that some post-2008 reforms, while necessary, had produced unintended consequences. These included constraining credit availability, pushing activity into the nonbank sector, and adding complexity and cost without proportionally enhancing safety and soundness. The revised framework aims to rectify these issues by improving the risk sensitivity of requirements for lending activities, including mortgages and credit cards, and by better aligning requirements with international standards. The proposal also seeks public feedback on the appropriate role of private mortgage insurance.
Changes to the G-SIB surcharge will account for shifts in economic growth and inflation, adjusting calculation coefficients to better reflect recent changes in the financial system. The proposal will also recalibrate risk assumptions associated with short-term wholesale funding and require banks to calculate certain systemic risk indicators as averages rather than year-end values, preventing end-of-year rushes to mitigate risk exposures. For operational risks, banks will be able to calculate them based on a standard calculation, aligning with international standards and accounting for fee-based activities on a net basis.