Today, U.S. bank regulators are set to formally unveil softened new draft capital rules, a move that could ease pressure on large Wall Street banks and potentially free up billions of dollars for lending, share buybacks, and dividends.
Capital levels at larger regional banks would fall by 5.2%, while banks below $100 billion in assets would enjoy a 7.8% decline in their capital requirements under the proposals.
The Federal Reserve, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency are expected to approve the revised Basel proposal and begin soliciting public comment, according to Reuters. Federal Reserve Vice Chair for Supervision Michelle Bowman said last week the package would modestly reduce capital requirements for large banks, with “slightly larger” reductions for smaller and community banks.
A Capital Rewrite With Mortgage Implications
For mortgage lenders, the significance is not just in the headline capital relief, but in how regulators are recalibrating the treatment of mortgage-related assets.
Bowman has said the proposals are intended to better align requirements with risk, reduce incentives for activity to migrate outside the banking system, and allow banks to engage more readily in lower-risk, traditional lending activities. That includes mortgage lending, which regulators have singled out as one of the “critical categories” addressed in the revised framework.
Mortgage Servicing Assets Back In Focus
One of the most consequential changes for the mortgage business is the proposed treatment of mortgage servicing assets.
Bowman said regulators would remove the requirement to deduct MSAs from regulatory capital while maintaining a 250% risk weight and seeking comment on whether that calibration is appropriate. She has also said the agencies are considering greater risk sensitivity for mortgage loans held on bank balance sheets, including the use of loan-to-value ratios in the capital framework.
Together, those changes could make it less punitive for banks to hold and service mortgages, an area many traditional lenders have retreated from over the past decade.
Community Banks Could See Greater Relief
Community banks could see a more pronounced benefit.
In addition to the broader capital rewrite, regulators previously proposed revisions to the Community Bank Leverage Ratio framework that would lower burden and provide qualifying community banks with greater flexibility in managing capital. Bowman said last week those changes, combined with the new standardized approach for non-G-SIB banks, are expected to produce slightly larger capital reductions for smaller institutions than for the biggest banks.
More Pressure On Nonbank Lenders
The shift could also reshape competitive dynamics across mortgage origination and servicing.
Post-crisis capital rules have been widely cited as one reason mortgage activity migrated from banks to nonbank lenders. Bowman explicitly tied the new proposal to removing incentives for that migration, while analysts have pointed to the possibility that easier capital treatment could make banks more willing to re-enter lines of business ceded to nonbanks.
If that happens, the result could be tougher competition in mortgage origination and servicing, especially in segments where banks have ceded market share over the last 15 years.
A Broader Deregulatory Push
The timing also aligns with a broader White House push to expand bank participation in housing finance.
President Donald Trump signed an executive order on March 13 directing federal agencies to consider changes intended to reduce mortgage regulatory burdens, particularly for community and smaller banks, and to promote access to mortgage credit. The order said those burdens have contributed to a significant decline in bank participation in mortgage lending.
What Comes Next
Morgan Stanley analysts estimated this month that large banks currently hold about $175 billion in excess capital. Greater clarity on the final rules could allow some of that capital to be redeployed, though critics argue the changes risk weakening safeguards put in place after the 2008 financial crisis.
KBW analyst Chris McGratty said the softened proposal appears much less onerous than the earlier draft, but cautioned that “the devil will be in the details.”
This article was primarily written by a human author. AI tools were used in a limited capacity for research assistance or light editing.
