The Federal Reserve Board of Governors will meet Thursday to discuss and vote on finalizing proposed rules for implementing Basel III capital requirements for banking organizations.

The vote comes after a recent progress report from the Basel Committee on Banking Supervision concluded that the United States is making little progress in adopting Basel III regulations.

Fed board member Daniel Tarullo on Wednesday said recent events serve to remind us that substantial amounts of capital is the best way to ensure that significant bank losses are borne by their shareholders, and not by depositors or taxpayers.

Those new amounts could impact mortgage servicing rights and mortgage rates.

“The best way to safeguard against taxpayer-funded bailouts in the future is for our large financial institutions to have capital buffers commensurate with their own risk profiles and the damage that would be done to the financial system if such institutions were to fail,” Tarullo said told a the senate banking committee.

Basel III reforms are intended to improve the quality of regulatory capital, increase the quantity of required minimum regulatory capital, require banks to maintain a capital conservation buffer and, for the first time internationally, introduce a minimum leverage ratio.

In drafting its pending regulations, the Federal Reserve used the Basel agreement, which requires banks to hold equity equal to at least 7% of their risk-weighted assets, compared with current standards of 2%. Under the Basel III Accord, the amount of mortgage servicing rights that banks can count as Tier 1 capital is capped at 10%, effective January 1, 2013, with a phased implementation through 2018. 

Rob Chrisman, an associate at the Stratmor Group, a mortgage consulting firm, says that, per indications from the FDIC, the vast majority of banks in the U.S are already in a position of compliance with the proposed Basel III rules, Therefore, he says, the Fed will probably vote to agree to the Basel proposals.

“While there are a number of years for it to be phased in, still, the impact on the value of servicing is not a positive,” Chrisman says. “Specifically, if a large servicer is near its MSR cap, its alternatives are somewhat limited, and none of them, as best I can see, have a positive impact on the value of servicing, and therefore none of them help the individual borrowers who are faced with rising loan costs.”

Federal Housing Finance Agency warned the Basel III capital requirement increases may result in higher mortgage rates for big banks.

“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,” the agency said.

Tarullo referenced JPMorgan Chase as an example of the need for robust bank capital requirements to ensure the safety and soundness of our financial system. The bank recently lost billions of dollars as a result of trading operations at its London branch.

The Federal Reserve is examining other parts of the JPMorgan to determine if governance, risk management and control weaknesses are present elsewhere. “While we have, to date, found no evidence that they are, this review is not yet complete,” Tarullo said.

Even without a formal draft of Basel III, banks are putting aside Tier 1 capital. Similar to the Basel III proposal, the Dodd-Frank Act contains several provisions relating to capital requirements for U.S. banking institutions.



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