FHFA warns Basel III may increase mortgage rates
Basel III will increase capital requirements for big banks, resulting in higher mortgage rates, the Federal Housing Finance Agency said.
The FHFA made that assertion in a paper released this week on proposed mortgage servicing compensation rules.
Basel III capital requirements were designed with the intent of ensuring systemically significant banks possess enough capital to cover future risks.
Because capital requirements are going higher, FHFA says "some of the largest originators, who are market leaders in setting mortgage rates, will need to either raise the mortgage rates offered to borrowers while reducing servicing released premiums paid in order to compensate for any incremental capital required, or accept lower returns."
Corporate borrowing costs – especially in Europe – also will feel the headwinds of stricter regulations spawning from Basel III, Standard & Poor's noted this week.
"The Basel III regulations, due to come into force in stages between 2013 and 2018 are likely to result in a repricing and even a rationing of credit for corporates globally, and change the behavior of lenders and borrowers," S&P said in its report. "Yet, European corporates will feel the effect more harshly than their U.S. counterparts because they typically rely more heavily on banks for funding relative to capital market sources, the report states."
The global Basel III requirements for systemically important banks also is catching heat for going against the American capitalistic grain.
In his own push back against Basel III, Christopher Whalen with Institutional Risk Analytics, punched holes in the regulatory structure.
"I think we can all agree that the statist, anti-democratic construction of Basel III is out of step with traditional ideas of American democracy and free enterprise," Whalen wrote. "The world of Basel III is all about top down management of the economy, the sort of socialist claptrap that was introduced into the U.S. political mainstream after the two world wars. Banks are, in fact, run like most other businesses, from the branch level up to the head office, but the deterministic world of Basel III is entirely European in outlook."
Whalen seems to see Basel III as a contradictory construct that will actually create a system riddled with greater risks.
"Americans need to reject new era concepts such as market efficiency and fair value accounting, two of the key pillars of the Basel III world that encouraged the growth of opaque OTC markets in mortgage securities and derivatives," Whalen said. "In good times, Basel III was an enabler for bad banking practices and excessive leverage. Now we are seeing the very same global bureaucrats who fomented the financial bubble rush around setting new, incomprehensible rules that we call Basel III.”
Write to Kerri Panchuk.
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