Powell: Fed is reviewing Basel III, supplemental leverage ratio rules

During a second straight day of testimony on Capitol Hill, Federal Reserve Chair Jerome Powell said the central bank is reviewing the Basel III rules (also known as the “Basel Endgame”), which would significantly increase bank capital requirements and could impact the mortgage industry, if implemented.

Powell’s statement comes as the Fed prepares to vote on a proposal to revise the supplemental leverage ratio for large banks.

If finalized as originally designed during the Biden administration, the Basel III rules would create higher capital requirements for large banks’ residential mortgage portfolios compared to international standards. Trade groups have opposed the move. 

Powell acknowledged that current capital levels are “well above” international standards and said the rule requires a “fresh start.”

In the mortgage space, first-lien whole loans that are prudently underwritten and performing according to original terms currently receive a 50% risk weight, while other loans carry a 100% risk weight.

But under the Basel III draft proposal, large banks would face risk weights of 40% to 90% on residential mortgages, depending on the loan-to-value ratio — roughly 20 percentage points above international norms.

This is not the first time Powell has referenced a review of the rules. In March 2024, he acknowledged growing opposition to Basel III from the banking industry during testimony before Congress, assuring lawmakers that significant changes would be made in the upcoming revisions to the regulatory framework.

Banks may also face revised requirements to their supplementary leverage ratio (SLR), with a new rule expected to face a vote on Wednesday. For the largest U.S. banks, the proposal would reduce capital requirements to a range of 3.5% to 4.5%, compared to the current “one-size-fits-all” approach of 5% for holding companies and 6% for subsidiaries.

The changes would redefine the SLR for subsidiaries as a buffer standard, or “early warning,” rather than a trigger for automatic corrective actions, thus making it less pro-cyclical.

This flexibility would allow banks to dip into their capital buffers during times of economic stress, potentially reducing the likelihood that they would scale back lending and other activities, according to Rodney E. Hood, the acting Comptroller of the Currency.

“The proposal would better tailor our capital requirements for banks to ensure the enhanced supplementary leverage ratio functions as a true backstop — not a primary constraint that limits lending unnecessarily,” Hood said.