Overall, these changes will reduce Tier 1 capital requirements by 4.8% for large banks (Tiers I and II), by 5.2% for Tiers III and IV, and by 7.8% for smaller institutions.
In mortgages, Basel III and the standardized approach proposals aim to increase incentives for origination and servicing by increasing risk sensitivity, including eliminating the deduction for certain asset-backed securities (MSRs). Instead, MSRs will receive a 250% risk weight, with regulators seeking feedback on whether that level is appropriate.
“This change will help encourage bank participation in the mortgage business, while recognizing uncertainty about firms’ ability to obtain value from mortgage assets during the economic cycle,” the Fed Board said.
The proposal would also assign risk weights to residential mortgage exposures based on loan-to-value (LTV) ratios. Risk weights can range from 20% for loans with a 50% LTV and up to 105% for those at 100% LTV but not dependent on real estate cash flow.
“Together, these reforms will strengthen our monetary framework, which will remain strong under the new administration,” said Michelle Bowman, the Fed’s vice chair, who led the effort. “A key benefit of these proposals is that they would reduce incentives for traditional lending activities – such as mortgage origination, mortgage lending, and business lending – to move outside the regulated banking industry.”
Not all policy makers agree. Fed Governor Michael S. Barr voted against the proposals, calling the capital reduction “unnecessary and unwise.” Governors Stephen Miran and Christopher Waller supported the changes, with Waller saying they would improve risk sensitivity without disproportionately increasing requirements.
Industry groups have widely welcomed the move. Mortgage Bankers Association (MBA) president and CEO Bob Broeksmit said the Basel III proposal “includes several important items that have been talked about for a long time,” including risk-free capital management and less punitive rules for MSRs and real estate.
“The MBA will consider this proposal closely and looks forward to engaging in the formal commenting process, including important technical aspects such as the proper management of loan assets and the wider application of these changes throughout the banking system,” said Broeksmit.
A coalition of five trade groups – the Consumer Bankers Association, Bank Policy Institute, American Bankers Association, Financial Services Forum again National Bankers Association – and praised the proposal, calling it an “important step forward” that could support lending while maintaining stability.
“Today’s proposal marks an important step forward,” the group said in a statement. “We welcome regulators’ efforts to allow banks of all sizes to make more money for American businesses and households, which spurs economic growth while maintaining stability in the banking system.”
Comments must be received on or before June 18, 2026.
