Michael Barr, the Federal Reserve‘s vice chair for supervision, on Tuesday spoke at the Brookings Institution in Washington, D.C., about the 2023 Basel III Endgame proposal, which would modify risk-based capital requirements for large banks.
Following an extensive review process that included stakeholder comments in the intervening time — including what Barr called “productive meetings with board colleagues and our fellow federal bank regulatory agencies“ at the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC) — the proposal is being revised.
“This process has led us to conclude that broad and material changes to the proposals are warranted,” Barr said on Tuesday. “As I said, there are benefits and costs to increasing capital requirements. The changes we intend to make will bring these two important objectives into better balance, in light of the feedback we have received. The changes to the endgame proposal have been a joint effort with my counterparts at the FDIC and the OCC.”
While Barr specified that the Basel III Endgame proposal’s credit risk and operational risk frameworks would not apply to large banks with assets between $100 billion and $250 billion, these banks would still be subject to rules dictating a certain amount of regulatory capital for “unrealized losses and gains on certain securities and other aspects of accumulated other comprehensive income (AOCI).”
Barr said the proposed changes include “reducing the risk weights for residential real estate and retail exposures, extending the scope of the reduced risk weight for certain low-risk corporate debt, and eliminating the minimum haircut for securities financing transactions,” he said.
He also described increasing aggregate common equity tier 1 capital requirements for the global systemically important banks (G-SIB) by 9%, and increasing capital requirements for non-GSIB firms subject to the rule by 0.5%.
He also said he would recommend “that the board not adopt the capital treatment associated with minimum haircut floors for securities financing transactions (SFTs). The proposal included heightened capital requirements for repo-style transactions and eligible margin loans that did not meet minimum margin requirements. While consistent with the Basel standard, several other major jurisdictions have not adopted this approach.”
The original set of proposals received substantial pushback from members of the housing and mortgage industries. But trade groups including the Mortgage Bankers Association (MBA) and the National Housing Conference (NHC) lauded the changes outlined by Barr on Tuesday.
“It appears that common sense has prevailed with the decision to re-propose the flawed Basel III Endgame proposal, a move that we have consistently called for since last summer in testimony before Congress, speeches, comment letters, and ongoing conversations with federal regulators,” MBA CEO Bob Broeksmit said in a statement.
He went on to say that MBA supports Barr’s revised recommendations to “recalibrate some provisions that would have had negative impacts on single-family housing and commercial real estate finance markets.” These include “removing the 20-percentage point risk-weighting add-on for single-family mortgages, which would have further diminished banks’ participation in mortgage lending while reducing credit availability for low- and moderate-income homebuyers.”
David Dworkin, president and CEO of the NHC, also lauded the revised recommendations.
“We commend the regulators for revising the capital requirements of the proposed Basel III Endgame, particularly concerning higher loan-to-value owner-occupied home mortgages,” Dworkin said. “It is clear that the Federal Reserve Board of Governors carefully considered the feedback submitted by a broad range of stakeholders. This is how the regulatory process is meant to work.”
Aligning these loans with existing capital standards will “avoid discouraging lending to homebuyers who do not have the benefit of multi-generational wealth or higher-than-average incomes,” Dworkin said.
He added that NHC appreciates the consideration of how capital requirements “are balanced with quantifiable risk, avoiding any unintended consequences that could hinder community development investments or lending in underserved areas.”