Basel III Implications for Banks with Mortgage-Servicing Assets

On October 27, 2017, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation collectively released a notice of proposed rulemaking.

Beginning January 1, 2018, the proposed Basel III framework capital rules would take effect, requiring banking organizations to deduct from Common Equity Tier 1 (CET1) capital any amount of mortgage-servicing assets (MSAs) that individually exceed 25% of CET1 capital. A 250% risk weight would also need to be applied to any MSAs deducted from CET1 capital.

Industry Reaction

While the proposed Basel III rule is a welcomed simplification of current regulatory capital calculations, certain constituents believe that the 250% risk weighting is a punitive change to bank regulatory capital rules that threatens to decrease the values of MSAs and undermine the incentive to service loans at small and medium-sized banking organizations.

Many mortgage-banking constituents remain unconvinced that the associated risks warrant the proposed treatment of MSAs, which would make them one of the costliest asset classes in the Basel III framework.

Next Steps

The three agencies are seeking comment on whether or not they should consider more comprehensive simplifications to the capital rule for small and medium-sized banking organizations.

Comment letters are expected in advance of the December 26, 2017 deadline, and may address any or all of the following:

  • Reducing the proposed 250% risk weighting for MSAs
  • Increasing the 25% MSA limitation of Common Equity Tier 1 capital
  • Providing implementation relief for banking organizations below a certain asset threshold

In a related development, on November 21, 2017, federal banking regulators finalized a pause on Basel III implementation to allow banks that aren’t subject to Basel III's advanced approaches to extend the current regulatory capital treatment of MSAs. The pause allows the regulators to fully consider a broader set of proposed simplifications in the capital rules for these institutions, and will likely be in effect until regulators finalize the more permanent simplifications in the Basel III proposed capital rules.

Advanced approaches-banking organizations—those with over $250 billion in assets or more than $10 billion in foreign exposure—are still required to apply the capital rules’ fully phased-in treatment for capital items beginning January 1, 2018.

We’re Here to Help

If you’d like to learn more about how the proposed Basel III rules could affect your organization, contact your Moss Adams professional.