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Experts: Basel III Will Mean Higher Borrowing Costs

The city of Basel, Switzerland, rejoined the debate over housing finance Tuesday ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô and not for Swiss mortgage rates.

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Earlier Tuesday the ""FDIC"":http://www.fdic.gov/ went forward with a notice of proposed rulemaking in the Federal Register that calls for annual stress tests to determine capital adequacy for banks.

The notice built on the Basel Accords, which the ""Basel Committee on Banking Supervision"":http://www.bis.org/bcbs/ (BCBS) revisited with help from a consortium of central bankers over 2010 and 2011.

Basel III is the latest by BCBS to require stress tests for so-called Global Systemically Important Financial Institutions, which include mortgage giants ""Bank of America"":https://www.bankofamerica.com/, ""Citigroup"":http://www.citigroup.com/citi/homepage/, ""JPMorgan Chase"":http://www.jpmorganchase.com/corporate/Home/home.htm, ""Wells Fargo"":https://www.wellsfargo.com/, and several other U.S. lenders.

Former FDIC chairman ""William Isaac"":http://www.sec.gov/spotlight/faivalue/marktomarket/wisaacbio.pdf warns that the framework presents a ""highly pro-cyclical"" set of rules for the economy and mortgage marketplace.

Isaac ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô a participant in negotiations that helped field Basel Accords I and II ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô tells us that Basel III demands ""banks increase their capital at a time when banks can least afford to capital.

""If you're worried about the economy and want it to grow again, then you should want banks to be out lending,"" he adds. ""Telling banks to triple their capital level during these difficult times will impede growth.""

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""Anat Admati"":http://gsbapps.stanford.edu/facultyprofiles/biomain.asp?id=44282009, a professor of finance and economics at the Stanford Graduate School of Business, points to the lurking threat of another global systemic financial crisis. She recently published a column with several other academes in The Financial Times that called the third accord ""far from sufficient to protect the system from recurring crisis.""

In it, she argued that the accord needs to fund at least 15 percent of an institution's non-risk-weighted assets, saying ""the social costs would be minimal, if any.""

But recent research presents Basel III as a potential problem for the mortgage marketplace.

A white paper published by the ""Federal Housing Finance Agency"":http://www.fhfa.gov/ found that Basel III ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô if adopted by the Federal Reserve, as news reports from December would suggest ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô would raise borrowing costs for homeowners and reduce capital value for mortgage servicing rights.

""David John"":http://www.fhfa.gov/, a senior research fellow with the ""Heritage Foundation"":http://www.fhfa.gov/, says that a preferential classification for sovereign debt and agency mortgage-backed securities may create problems for lawmakers who aim to reform Fannie Mae and Freddie Mac.

He says assumptions about agency debt may allow banks to carry ""securities on the books at one value but with a liquidation value that is substantially less, which would be exceedingly dangerous"" to the global financial system.

As for the fixed-rate mortgage itself?

""Eventually mortgages will be more expensive and much riskier for the holder,"" John says, predicting that subsidies for existing bank capital requirements ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô a factor in keeping mortgage rates near record lows ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô may come to an end.

He says that Basel III will force U.S. policymakers to ""take a look at whether we will need to adopt European standards, at least in mortgage markets.""

The nation's biggest bankers will need to raise their minimum capital buffers in accordance with regulation by 2013, and then continue to meet basic requirements under Basel III in successive phases.

About Author: Ryan Schuette

Ryan Schuette is a journalist, cartoonist, and social entrepreneur with several years of experience in real-estate news, international reporting, and business management. He currently lives in the Washington, D.C., area, where he freelances for DS News and MReport.
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