Bob Broeksmit, president and CEO of the Mortgage Bankers Association (MBA), expressed support Tuesday for federal banking agencies’ Basel III reproposal while offering suggestions for how to improve the global banking framework.

Testifying before the House Financial Services Committee alongside four other witnesses, Broeksmit elaborated on the MBA’s Basel III stance, which the association had previously called a “pivotal step” toward more balanced capital standards.

Basel III is a global banking framework developed after the 2008 financial crisis that established revised standards for bank capital requirements and other liquidity considerations. On March 19, the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. proposed revisions to the Basel III framework.

Sitting alongside Greg Baer, CEO of the Bank Policy Institute, and Luigi De Ghenghi, a partner at Davis Polk & Wardwell, Broeksmit told the committee the MBA was glad to see the direction of the notice of proposed rulemaking.

“This new proposal is meaningfully better than the current bank capital framework and the proposed revisions advanced in 2023 that would have caused serious disruption to both residential and commercial real estate markets,” Broeksmit said in his opening statement, according to a transcript shared by the MBA.

There were a number of recommendations in Broeksmit’s testimony, noting that bank capital rules should be recalibrated for the current marketplace, rather than the pre-crisis market.

“As banking regulators contemplate finalizing the Basel III ‘Endgame’ rule, it is important that the following considerations be specifically addressed to ensure liquidity and more robust lender participation in the mortgage origination and servicing market,” he stated.

The first proposal was to reduce the current 250% risk weight, which he described as “punitive.”

This risk weight assigned to mortgage servicing assets (MSAs) “has played a key role in banks’ retreat from the mortgage origination and servicing market, reducing competition for consumers and removing a bank bid for MSAs, in turn reducing liquidity and increasing mortgage rates,” Broeksmit testified. He noted that the current 250% risk weight was adopted in 2013 under the Basel III framework in reaction to the 2008 financial crisis, a 150% increase from the previous 100% level.

“As MBA noted at that time and has done so repeatedly since then, there was no articulated rationale or empirical analysis provided by regulators to justify the significant increase in risk weight for MSAs,” he continued. “We believed then (and continue to do so now) that the current punitive treatment of MSAs was erroneously based on uncertainty, rather than any demonstrated loss behavior relating to the asset itself.”

Broeksmit commented that “MBA believes any number above a 100% risk weight on MSAs overstates the risk posed by the asset in today’s servicing environment, and therefore, we recommend a 100% risk weight that properly aligns regulatory capital with empirical evidence of risk relating to the asset.”

A second recommendation was to eliminate the 25% cap on MSAs that can be included in Common Tier 1 capital.

“MBA has long advocated for an increase in the cap. Therefore, we are very encouraged by the proposed elimination of the cap in the [notice of proposed rulemaking] and fully support such a change,” Broeksmit testified. “It is important to stress, however, that elimination of the cap is only one half of the solution to the current problem of banks’ pullback from the mortgage origination and servicing business.”

Broeksmit stated that addressing both the 250% risk weight and the 25% cap would ensure banks could view the mortgage market as a core strategy and help strengthen ties with the communities they serve.

“MBA fully supports the proposed elimination of the current 25% cap and urges that this action be tied to a reduced risk weight for MSAs,” he stated.

For single-family residential real estate, Broeksmit also recommended reducing the 100% risk weight currently assigned to warehouse lines of credit. Calling them a “critical source of support” for the mortgage market, he said the capital treatment of residential mortgage loans held on a warehouse line should be reduced and assigned the same risk weight as the mortgages collateralizing the warehouse line.

The public comment period on the Basel III reproposal closes on June 18.