Fed Votes to Implement Basel III, Servicing Ramifications

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The Federal Reserve Board on Thursday unanimously approved the release of a set of proposals that would raise banks’ minimum capital requirement to 7%.

U.S. regulators have been working steadily to draft rules that would effectively adopt international capital standards set by the Basel Committee on Banking Supervision that are designed to prevent a repeat of the financial crisis.

One part of Basel III caps how much residential mortgage servicing rights can count toward core capital. It’s expected that if the MSR cap is too restrictive it may force large banks to reduce their footprint in the servicing business. 

The central bank’s board met Thursday afternoon to consider and vote on three proposals, which would establish minimum capital requirements, a leverage ratio, and a countercyclical buffer. It also voted to approve a final rule that would reduce banks’ reliance on credit ratings in capital requirements.

While the proposals were largely as expected, their significance cannot be understated.

Fed Chairman Ben Bernanke hailed the three proposals as an “attractive package,” which laid out measures for banks to provide more and better capital consistent with the international accord and within an integrated framework.

“This may well be the standard which other countries around the world are measured going forward,” said Bernanke at the board meeting. “And I hope other countries, other jurisdictions will meet this standard.”

Newly installed Fed Gov. Jeremy Stein drew attention to the significance of lifting capital requirements.

“It’s worth stepping back and sort of recognizing the accomplishment here,” said Stein. “There’s always more to do on financial reform. There’s a lot of important stuff to be done, but on the simplest metric we have which is common equity capital we’re moving from a world where 2% was the norm to a world where 7% is the norm. That alone is one of the most important steps that we can take to safeguard the financial system.”

Still, not all governors—even those who were supportive of the measures—believed the new set of rules would sweep away all risk.

“From a regulatory and supervisory perspective, we cannot declare with these proposed rules mission accomplished,” said Fed Gov. Sarah Bloom Raskin. “While the imposition of these capital rules and buffers are important and necessary steps toward strengthening the regulatory framework that large, complex banks operate within they are not sufficient.”

Raskin noted that the proposed capital rules were designed to focus on risk created by particular types of assets. Operational risk or reputational risk, for example, wouldn’t necessarily be accounted for.

 

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