Regulators are trying to assure lawmakers and financial institutions that they would weigh potential conflicts from a slew of proposed mortgage regulations due out shortly as they finalize Basel III capital and liquidity rules.
"We recognize the close linkage and the potential interactions have to be taken into account," said George French, deputy director of risk management supervision for the Federal Deposit Insurance Corp., at a recent joint hearing of two House Financial Services subcommittees. "We certainly looked at the proposed 'qualified mortgage' standards as we were developing those mortgage proposals in these rules."
Though the rules are not directly related, they are interconnected. The Basel III proposal issued by regulators in June would assign a higher risk-weighting for mortgages, based partly on the experiences of the financial crisis. That would effectively force banks to raise capital against mortgages they hold. At the same time, however, regulators are working on rules that would require lenders to ensure borrowers have the ability to repay mortgages, including creating a safe-class of loans that will be dubbed "qualified mortgages."
Bankers are concerned that taken together the rules will impair their ability to make mortgages.
"People are very concerned about how these two rules will interact," French said. "Those are very significant observations that we have to look at as we develop how to proceed with these rules."
Making things more complicated are the sheer number of regulators involved. The Federal Reserve Board, FDIC and Office of the Comptroller of the Currency are developing the Basel III rules while the Consumer Financial Protection Bureau is in charge of the qualified mortgage plan. The banking regulators must also still finalize a rule that requires lenders to retain 5% of a mortgage unless it meets separate criteria of a "qualified residential mortgage."
Bank regulators stressed to lawmakers at the hearing that they are considering a range of issues, including how provisions could impact residential mortgages.
"We are sensitive to the comments of community banks," said Michael Gibson, director of the division of banking supervision and regulation for the Fed. "There are many aspects of the proposal where we've learned a lot from the comments about the details of where there might be some impacts that we need to look at. But stronger quality and quantity of capital for all banks is an important reform."
Lawmakers on both sides of the aisle acknowledged the necessity for improved capital requirements at banks of all sizes, but expressed concern on differentiating how to apply such complex rules to smaller-sized and regional banks.
"A case can be made that we need higher-quality capital," said Rep. Jeb Hensarling, R-Texas, the incoming chairman of the House Financial Services Committee. "It is a very poor case for more complex capital standards that do not recognize the difference between large money center banks and our community financial institutions."
It was the second hearing this month on the U.S.' adoption of Basel III, which is designed to improve the quality and quantity of capital that banks of all sizes must hold to prevent a repeat of the financial crisis.
The U.S., along with other member nations, had pledged to begin implementing Basel III by Jan. 1, but opted earlier this month to indefinitely delay the rules given the more than 2,500 comments the agencies received.