The Federal Reserve and Basel III

Last week, the Federal Reserve shared plans for future bank reforms that reach beyond the international Basel III agreement, a move lauded by the Mortgage Bankers’ Association.  The MBA yesterday issued a statement saying, “MBA applauds the federal banking regulatory agencies for bringing certainty to the marketplace through issuance of its final rule today on Basel III.”

The first reaction to this development may naturally be, “What is Basel III?” The answer is that the Basel III accord is a global agreement to strengthen banks’ stability after the 2007-2009 financial crisis. Its notoriety has resurged recently because many feel that it did not go far enough.  "The Basel III leverage ratio seems to have been set too low to be an effective counterpart to the combination of risk-weighted capital measures that have been agreed internationally," said Daniel Tarullo, the Federal Reserve board member in charge of financial supervision.

While MBA indeed celebrated the rule’s lack of additional requirements for risk-based capital in commercial real estate mortgages and most loans secured by single-family mortgages, they did share a few concerns and echo once again a few old, familiar ones. David H. Stevens wrote again yesterday that ““the Basel III final rule, when combined with the massive regulatory overhaul facing the real estate finance industry, will have the unfortunate effect of tightening credit, at a point in time when credit availability is one of the biggest challenges facing US home-buyers.”

While some laud the Federal Reserve for bringing more certainty to the mortgage industry by clarifying previously murky rules, naysayers continue to suggest that the rules are not focusing on the right metrics, with many tired of this new focus on matters other than weighing risk.

What are your thoughts on this previously obscure piece of federal regulation? Leave us a comment below.

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