Powell acknowledges concerns about Basel III bank proposal 

Federal Reserve Chair says that ‘broad material changes’ are on the way but declines to provide details

The Federal Reserve and other regulators will be making significant changes to the so-called “Basel III endgame,” Fed Chair Jerome Powell said on Wednesday as he testified before Congress. 

Powell acknowledged the mounting opposition to Basel III from the banking sector, assuring lawmakers of forthcoming broad revisions to the regulatory framework that is aimed at recalibrating risk assessment methodologies and capital reserves.

The proposal, introduced in July 2023, seeks to redefine risk evaluation practices and bolster capital requirements for banks to mitigate potential losses. But major financial institutions have opposed the proposal, decrying its adverse effects on lending activities.

Implementation of the proposal could compel approximately three dozen of the largest U.S. banks to earmark billions more in capital reserves.

Powell expressed his awareness of industry complaints about the costs and potential economic impacts of the regulation.

“We do hear the concerns and I do expect there will be broad material changes to the proposal,” he told the House Financial Services Committee on Wednesday. “I’ll add that I’m confident that the final product will be one that has broad support at the Fed and in the broader world.”

Powell noted that regulators were in the early stages of absorbing feedback and evaluating possible changes. He refrained from commenting on specific changes.

The Fed chief faced another wave of questions about the Basel proposal during his second day of testimony on Capitol Hill on Thursday. He underscored the Federal Reserve’s commitment to adapt or even overhaul the existing proposal to ensure consensus and efficacy. He anticipates a final set of rules will be released this year.

The proposed reforms have sparked particular concerns within the housing sector, notably regarding the impact on the jumbo mortgage market and regional banks. Heightened residential mortgage capital requirements for larger depository institutions could further strain an already challenged housing finance landscape.

Since the aftermath of the 2008 financial crisis, depository lenders have gradually retreated from the residential mortgage sector due to escalating capital costs and diminished profitability. Independent mortgage banks, which have less stringent regulatory requirements, now command nearly two-thirds of the mortgage market, according to Mortgage Bankers Association (MBA) data.

Industry experts also fear that a substantial uptick in capital requirements, ranging from 15% to 20%, could dissuade banks from engaging in warehouse lending. It could also dissuade them from trading mortgage-backed securities (MBS) and mortgage servicing rights (MSR), thereby impeding mortgage liquidity. 

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