Miki Bowman Pushes Back on Basel III & Residential Mortgages

February 17, 2026 | Last week Federal Reserve Board Vice Chairman for Supervision Michelle "Miki" Bowman gave a very significant statement about banks and the Basel III risk weights for residential loans and mortgage servicing rights to the American Banker Association.

This statement was important because it is the first time in 15 years that an American regulator implicitly rejected the European view of mortgage loans, MSRs and other intangible assets related to consumer finance. The changes proposed by Governor Bowman, if made effective, will have a significant and very positive impact on banks and non-banks operating in the residential mortgage market.

The United States began negotiating the Basel III framework with European counterparts and other international members of the Basel Committee on Banking Supervision (BCBS) shortly after the 2008 financial crisis, specifically starting in 2009–2010 under Presidents George W. Bush and Barack Obama.

Following the collapse of Bear Stearns in March 2008 and then Lehman Brothers in September 2008, the takeover of the GSEs and the forced sale of Countrywide to Bank of America, the BCBS began a comprehensive revision of capital standards, with a focus on strengthening the framework in 2009 and announcing the overall design of the Basel III package in July 2010.  

What Basel III represented in practice was a rejection of GAAP accounting and a well-established acceptance of intangible assets in American finance, especially payment intangibles like MSRs with identifiable cash flows. Instead the US negotiators, who had no discernable brief from the Obama White House or the banking industry, accepted the European hostility towards intangible assets under the IFRS accounting rules and particularly real estate finance.

Both fully secured mortgage loans and MSRs were unfairly demonized by US and European officials who frankly did not understand or appreciate the economic significant of secured finance in the US economy. MSRs were assigned a 250% risk weight even though servicing assets carry no credit risk. Today, MSRs are one of the most sought after and valuable assets in finance.

More, even after the 250% risk weight assigned to servicing assets under Basel III, banks were forced to subtract the MSR from capital, mimicking the treatment of this valuable intangible asset under international accounting rules. Adding to the damage, the mortgage agencies such as Fannie Mae, Freddie Mac and Ginnie Mae mimicked the idiotic Basel III treatment of MSRs and imposed similar requirements on independent mortgage banks (IMBs).

It is difficult for Americans to understand the hostility of EU regulators towards intangible assets and mortgage finance in particular. Regarding MSRs, everything that doesn’t affect European banks, who don’t engage in disintermediated finance in mortgages, will be regulated out of existence. Secured finance in Europe is largely controlled by government agencies, one of the reasons why economic growth in Europe is so constrained.

The crucial mistakes made during the negotiations for Basel III led to a bank withdrawal from residential lending and holding MSRs over the decade following the implementation of Basel III. For this reason, the import of the changes suggested by Governor Bowman are enormous. She suggests two key modifications to Basel III:

Two regulatory proposals will soon be introduced that, among other broader changes to the regulatory capital framework, would increase bank incentives to engage in mortgage origination and servicing. First, the proposals would remove the requirement to deduct mortgage servicing assets from regulatory capital while maintaining the 250 percent risk weight assigned to these assets. We will seek comment on the appropriate risk weight for these assets.  This change in the treatment of mortgage servicing assets would encourage bank participation in the mortgage servicing business while recognizing uncertainty regarding the value of these assets over the economic cycle.

Second, the proposals would also consider increasing the risk sensitivity of capital requirements for mortgage loans on bank books. One approach would be to use loan-to-value ratios to determine the applicable risk weight for residential real estate exposures, rather than applying a uniform risk weight regardless of LTV. This change could better align capital requirements with actual risk, support on-balance-sheet lending by banks, and potentially reverse the trend of migration of mortgage activity to nonbanks over the past 15 years.    

It is way too early to discuss the significance of Bowman's proposal, but there are some obvious points for both banks and IMBs. First, if banks no longer must subtract MSRs from Tier 1 capital, the economics of holding MSRs will change a lot. Banks will retain or purchase more MSRs for portfolio, adding a strong incentive for banks to increase their share of residential lending. IMBs will remain more efficient than banks, however, and will likely remain the largest servicers of mortgage loans.

The same point applies to Bowman's proposal regarding whole loans, which have been declining as a portion of bank assets for 40 years (see chart). Scoring the risk of residential mortgages by loan-to-value (LTV) ratio makes enormous sense. More, by ending the need for banks to subtract MSRs from capital, the Fed's proposal will almost certainly force the FHFA and HUD/Ginnie Mae to revisit capital requirements for IMBs that were based on the misguided Basel III framework.

Source: FDIC

We'll be writing more about this issue in coming editions of The Institutional Risk Analyst.

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