Federal Reserve Vice Chair for Supervision Michelle Bowman used her February 16, 2026 remarks at the American Bankers Association Community Bankers Conference to preview a significant new capital rulemaking aimed at community and regional banks. This speech clearly indicated that the banking agencies intend to revisit elements of risk-based capital framework for community and regional banks, in addition to any re-proposal of the Basel III Endgame. Highlighting data showing a meaningful migration of mortgage origination and servicing activity away from the banking sector, Bowman emphasized the need to reassess aspects of the regulatory capital framework related to mortgage origination and mortgage servicing rights (MSRs).
Background
According to Bowman, in 2008, banks originated roughly 60% of all mortgages and serviced 95% of balances; however, by 2023, those numbers had fallen to 35% and 45%, respectively. This shift, according to Bowman’s analysis, was primarily attributable to regulatory over-calibration, particularly the 2013 changes to the capital treatment for MSRs.
Regulatory Path Forward
To address this concern, Bowman previewed two regulatory proposals that would reshape current capital requirements:
- Revised treatment of MSRs: Remove the requirement to deduct MSRs from regulatory capital while maintaining the 250% risk weight and seek comment on whether that risk weight remains appropriate. This change is intended to encourage bank participation in the mortgage servicing business while recognizing the valuation uncertainty associated with MSRs across the economic cycle.
- LTV-based risk sensitivity for mortgage loans: Increase the risk sensitivity of capital requirements for residential mortgage exposures by more granularly tying risk weights to loan-to-value (LTV) ratios rather than applying a uniform risk weight. This approach could better align capital requirements with actual risk, with lower risk weights assigned to lower LTV mortgages, similar to the international Basel III proposal. This change would support on-balance sheet lending by banks and potentially reverse the trend of migration of mortgage activity to nonbanks.
By reducing structural disincentives and better aligning capital requirements with underlying risk, the regulators appear to be positioning to create space for smaller institutions to reengage in mortgage lending and servicing. If adopted, these changes could help rebalance the competitive landscape and reestablish a more durable role for banks in a market that has increasingly migrated toward nonbank entities.
Our View: Anticipated Regulatory Developments
We anticipate the Vice Chair’s remarks to serve as an early signal of a dedicated capital rulemaking running parallel to the Basel III Endgame framework. While distinct in scope, we anticipate that the regulators would align the timing of this capital proposal with the Basel III Endgame rollout to provide a cohesive regulatory pathway and avoid prolonged regulatory uncertainty.
Based on the Vice Chair’s preview, such rulemaking would have a particular focus on mortgage-related exposures, including MSR treatment and a more granular LTV-based capital framework. However, it is also possible that the proposal could include additional elements in light of the lessons learned from the 2023 bank failures. For example, the agencies could potentially reconsider the Accumulated Other Comprehensive Income (AOCI) filter for certain smaller banks.
While we do not know the specifics of the proposal, below are the current U.S. LTV-based risk weights and the Basel international LTV framework, which illustrate the range of potential benefits of a more risk-sensitive approach. It should be noted that the Basel International framework requires an operational risk charge that is not presently a part of the U.S. framework. While we do not expect the agencies to propose an operational risk charge, they could adjust risk weights in the Basel International LTV Framework upward to account for operational risk.
| Current U.S. Risk Weights | |
|---|---|
| Asset | Risk Weight |
| Loans that meet the definition of residential mortgage exposure or statutory multifamily mortgage that are secured by collateral or guarantee that qualifies for 0% RW | 0% |
| Loans collateralized by deposits at the reporting institution | 0% |
| Carrying value of the guaranteed portion of Federal Housing Administration (FHA) and Veterans Affairs (VA) mortgage loans included in RC-C Part I 1c2a | 20% |
| Portions of exposure covered by an FDIC loss-sharing agreement | 20% |
| Qualifying loans from RC-C Part I 1c1 (1st lien ONLY), 1c2a, and 1d; MUST meet definition of a residential mortgage exposure in Section .32(g) of the regulatory capital rules | 50% |
| Loans that meet definition of statutory multifamily mortgage in §.2 of the regulatory capital rules | 50% |
| Portion secured by a collateral or a guarantee that qualifies for 50% RW | 50% |
| Portions not in any other columns or RW categories | 100% |
Basel International LTV Framework | |
|---|---|
| LTV Range | Basel Risk Weight |
| <50% | 20% |
| 50–60% | 25% |
| 60–80% | 30% |
| 80–90% | 40% |
| 90–100% | 50% |
| >100% | 75% |
A shift toward the Basel International LTV framework, even on a limited basis, would introduce more granularity and could reduce capital requirements for well-secured mortgages, supporting renewed participation in mortgage lending and servicing.
However, in exchange for capital benefits, banks would face a more data-intensive framework. A shift toward risk-sensitive treatment of mortgage exposures would require banks to strengthen the accuracy, granularity, and governance of loan-level data across the mortgage life cycle. Banks will need highly reliable and current LTV data, supported by timely MSR valuations, richer MSR modeling inputs, and stronger servicing liquidity analytics. Firms that can refresh MSR valuations quickly, harmonize data across the mortgage life cycle, and run risk-weighted asset “what if” scenarios at scale will be ready to hit the ground running if these reforms advance.
How Forvis Mazars Can Help
With the regulators signaling dedicated capital proposals for small banks, institutions should begin preparing now for a shift in the capital framework governing mortgage-related exposures. While more details will emerge through formal rulemaking, several steps institutions should take include, but are not limited to, assessing MSR strategy and capital impact; evaluating mortgage underwriting and pricing through an LTV lens; strengthening data, reporting, and risk-sensitivity capabilities; and engaging early in the rulemaking process.
We are tracking regulatory developments here. In the meantime, if you have any questions or need assistance, please reach out to a professional at Forvis Mazars and let us be a resource for your institution.