US banking regulators are expected to publish their plans next week for a in-depth overhaul of capital rulesthe latest draft including requirements for residential mortgages from major lenders that go beyond international standards.
The changes would be part of the US version of a global agreement known as Basel III that followed the financial crisis. The plans are set to be unveiled on July 27 by the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, according to three people familiar with the proposal who asked not to be identified while discussing details ahead of the announcement.
Although regulators said the big Wall Street banks could face a 20% average increase in overall capital requirements, the focus on residential mortgages from big lenders was not mentioned. The United States was expected to maintain these mortgages in accordance with the international framework.
For big banks, agencies wanted to go beyond global standards for residential mortgages, as well as some business loans, to avoid giving these lenders a competitive advantage over their smaller peers, according to another. person familiar with the proposal. The Fed wanted banks of different sizes to treat comparable home loans the same, the person said.
Industry will almost certainly criticize the proposal as another onerous measure to “gold plate” US requirements by making them stricter than global standards. Banks have complained for years that reforms after the 2008 financial crisis gave less regulated non-bank lenders an unfair advantage. And they warned that additional requirements risk increasing borrowing costs at a time when the dream of home ownership has become more elusive for the average American.
Spokespeople for the FDIC, Fed and OCC declined to comment.
The proposed measure would increase the so-called risk weights for many residential mortgages by international standards, the three people said, meaning they would play a bigger role in determining overall capital requirements.
Risk weights do not correspond to the amount of capital that banks must hold. Rather, they are percentages assigned to account for the risk of various types of assets. Higher risk weights apply to assets that regulators deem to pose higher risks.
In the United States, a 50% risk weighting is now assigned to many residential first mortgage loans.
Now, federal regulators are considering applying risk weights of 40% to 90% for big banks, depending on the loan-to-value ratio, according to one of the people. Riskier loans, with higher LTV ratios, would get the highest risk weights.
The risk weights proposed at all levels are 20 percentage points higher than those of the Basel III international framework, according to the three people.
Residential mortgage-backed securities backed by government-sponsored companies would not be affected by the change in the United States.
When the full US capital requirements are announced, it will also attract banks with at least $100 billion in assets. That’s well below the current $250 billion threshold to which many of the tougher rules apply, meaning dozens of U.S. regional banks could have to meet the new standard.
The measure will also ensure that mid-sized banks – similar in size to the failed Silicon Valley Bank – disclose that their unrealized losses on available-for-sale securities on the balance sheet are capitalized when sold.