In a strategic move aimed at reshaping the US housing loan landscape, Michele Bowman, Vice Chair of the Federal Reserve's Board of Supervision, announced that the central bank intends to ease capital requirements for major banks. This announcement is a serious attempt to encourage traditional banking institutions to expand their activities in the mortgage market, where banks have seen a significant decline in their role over the past decade and a half.
Regulatory changes to restore balance
Bowman explained that the Federal Reserve is preparing two significant changes to its existing regulations. The primary goal of these changes is to incentivize banks to become more actively involved in the mortgage lending and services sector. These moves come at a time when the banking industry is facing regulatory challenges that have made the cost of holding capital for mortgage loans a burden that limits banks' competitiveness.
Historical background: Transformations in the mortgage market
To understand the significance of this decision, one must consider the historical context following the 2008 global financial crisis. After the crisis, banks faced strict regulations aimed at ensuring financial stability, which indirectly led to their gradual withdrawal from the mortgage market. Data reviewed by Bowman indicates that banks' share of mortgage lending fell dramatically from 60% in 2008 to just 35% by 2023.
The rise of non-bank financial services companies
In contrast, non-bank financial services companies (or "shadow banks") have filled the void left by traditional banks, capturing an increasing share of the market. While this has provided alternatives for borrowers, Federal Reserve officials believe that the return of regulated banks to the market is vital to ensuring the long-term stability of the financial system and protecting consumers.
Expected economic impact
The easing of capital requirements is expected to free up substantial cash reserves that were previously held as mandatory reserves, allowing banks to inject it into the housing market. This measure could lower borrowing costs for Americans looking to buy homes and boost the construction and housing sector, a key driver of the US economy. This approach also reflects the Federal Reserve's flexibility in balancing financial stability requirements with the need to support economic growth.
