Regulatory Capital: Regulatory Capital and Standardized Approach for Risk-Weighted Assets

The Wisconsin Bankers Association (WBA) supports the proposed revisions to the regulatory capital rule, praising the data-driven effort to improve risk sensitivity and reduce complexity. However, the association urges the agencies to ensure that capital relief benefits are shared more evenly across the industry, particularly for commercial and agricultural lending, to avoid widening the gap between community banks and larger institutions.

The Commercial Real Estate Finance Council (CREFC) generally supports the proposed revisions to the regulatory capital framework, noting that they incorporate several requested industry improvements. However, the organization requests specific refinements to risk weights and definitions to ensure they accurately reflect the risk profiles of commercial real estate (CRE) exposures and maintain market liquidity.

The Bank Policy Institute, the American Bankers Association, the U.S. Chamber of Commerce, and the Consumer Bankers Association support the agencies' tailored approach to capital requirements and the goal of improving risk sensitivity. However, they strongly oppose specific proposed revisions to the definitions of "commitment" and "unconditionally cancelable," arguing these changes are ambiguous, lack a clear legal anchor, and would create unquantifiable increases in capital requirements.

The National Association of REALTORS® (NAR) supports the proposed changes to the Basel III framework, noting that they improve banks' ability to participate in mortgage finance and enhance housing ecosystem resilience. While generally supportive, the association advocates for further refinements to align capital charges with risk for high-LTV borrowers, rental properties, and private mortgage insurance (PMI) to better support housing affordability.

The Community Home Lenders of America (CHLA), an organization representing non-bank mortgage lenders and servicers, supports the proposed reductions in risk weights for bank whole residential mortgages and mortgage servicing rights (MSRs). While they support these changes, they also request that the risk weight for warehouse loans be reduced to 50% and call for the creation of a standby liquidity facility for non-bank issuers of Ginnie Mae securities.

The Council of Federal Home Loan Banks, representing the FHLBank System, supports the Agencies' efforts to simplify and standardize capital requirements while improving risk sensitivity. They request specific technical revisions to the proposed rules regarding supervisory haircuts for GSE debt, cross-product netting for derivatives and repo-style transactions, and the treatment of FHLBank advances under the GSIB surcharge framework to avoid unintended liquidity and funding impacts.

Austin Tilghman, CEO of UCM, Inc., supports the proposal to revise regulatory capital for mortgage servicing assets (MSAs) but argues it does not go far enough. He advocates for a significant reduction of the 250 percent risk weight to 100 percent and additional capital relief for effective hedging to better align capital requirements with actual risk and encourage bank participation in the mortgage market.

The Federal Home Loan Banks (FHLBanks) support the proposed rule to align capital requirements with actual risk exposures, specifically praising the removal of mortgage servicing asset deductions and the reduction of risk weights for residential mortgages. They argue that the current framework creates a disproportionate capital burden on community banks and request further specific adjustments to the risk weight for FHLB credit enhancement obligations to 100 percent.

Robert Kazdin, a former banking and housing finance official, supports the proposed rule's improvements to mortgage credit risk but argues it is insufficient because it lacks a standardized framework for interest-rate risk (IRR). He recommends that the agencies adopt a quantitative IRR capital charge, citing the 2023 banking crisis and international precedents as evidence that duration exposure requires formal capitalization.

David Stephens, a mortgage banking consultant, supports the proposal to eliminate the threshold-based deduction for mortgage servicing assets (MSAs) but argues that the agencies should further reduce the risk weight for MSAs from 250% to 100%. He contends that the 250% weight is punitive and lacks empirical justification, and that a lower risk weight would improve market liquidity and competition.