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The Fed Wants to Let a Dangerous Asset Loose on Bank Balance Sheets

The Federal Reserve has proposed three adjustments to how banks treat mortgage loans and mortgage servicing rights (MSRs) under capital rules. While the new loan‑to‑value risk‑weight buckets and a review of the 250% MSR risk weight align with Basel principles, the plan to eliminate the deduction for MSRs that exceed 10% of common equity Tier 1 would re‑introduce a highly volatile, model‑driven asset onto bank balance sheets. Critics argue this could amplify balance‑sheet risk and incentivize aggressive valuation practices. A middle‑ground cap, similar to Ginnie Mae’s approach, is suggested to mitigate these concerns.