Barr: Fed is taking ‘thoughtful approach’ to Basel III rules

Federal Reserve vice chair for supervision Michael Barr said the central bank is taking “a very thoughtful approach” to the Basel III rules (aka the Basel endgame), which would significantly increase bank capital requirements and, if implemented, affect the mortgage industry.

“We gave the public extra time to comment on the rule because it was really complex. We’re analyzing those comments,” Barr said Wednesday afternoon during a conference hosted by the National Community Reinvestment Coalition (NCRC) in Washington, D.C. “I expect them to make adjustments to the final rule. I think it will be a good, strong rule when it’s done.” 

Barr said, however, that “external chatter” about the rule “is not very helpful.” 

In early March, Fed Chair Jerome Powell acknowledged the mounting opposition to Basel III from the banking sector when testifying before Congress. Powell assured lawmakers that significant changes would be made to the forthcoming broad revisions to the regulatory framework. 

If approved, the changes would boost capital requirements for large banks’ residential mortgage portfolios compared to international standards. Trade groups have opposed the new regulations.  

Currency, first-lien whole loans prudently underwritten and performing to their original terms receive a 50% risk weight, while other loans receive a 100% risk weight. 

Under the draft proposal, 40% to 90% risk weights would be assigned for large banks that issue residential mortgages, depending on the loan-to-value ratio, which is 20 basis points above the international standard.  

The proposed rules were released last year after the collapse of multiple banks, including Silicon Valley Bank and Signature Bank. 

Barr said that the U.S. banking system is “sound and solid” and is not under the same liquidity pressure it faced last year. But there are some banks “that are more under stress” than others and there are “pockets of risks in the system,” he added.

The Fed is mainly concerned with financial institutions that have high concentrations in commercial real estate, primarily the office sector, where there are significant “expected price declines.” He said that the Fed is looking at things such as unrealized losses on the balance sheet from securities.  

“This is the kind of thing where it’s likely to be a very slow-moving train as the financial sector and commercial real estate market move forward,” Barr added.