Senate Banking Committee Hearing• Feb 26, 2026• 9:24

Senate Banking Committee Hearing | February 26, 2026

From Senate Banking Committee Hearing

Executive Summary

Federal banking agencies are preparing to release new capital proposals, including the Basel III endgame, by the end of March.
A key focus of the upcoming proposals is the impact of capital rules on smaller institutions, particularly the 25% aggregate cap on Mortgage Servicing Assets (MSAs).
Regulators acknowledge that the current MSA cap can be punitive for community banks, forcing them to sell servicing rights and potentially harming customer relationships.
The FDIC's 2020 reforms to the Industrial Loan Company (ILC) regulatory framework are considered successful in enhancing safety and soundness through stronger parent company oversight.

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Concerns Raised

Current capital rules, specifically the 25% MSA cap, negatively impact the competitiveness of community banks.
Punitive capital charges force banks to sell off mortgage servicing, severing valuable, long-term customer relationships.
A lack of regulatory tailoring can disadvantage smaller institutions that rely on a relationship-based lending model.

Opportunities Identified

The upcoming Basel III endgame proposal offers a chance to revise and better tailor the MSA cap for community banks.
Raising the MSA cap could increase stability and liquidity in the single-family mortgage market.
Regulators appear open to dialogue on ensuring new capital rules support both safety and the ability of smaller banks to compete.

Key Themes

Regulatory Tailoring for Community Banks

The discussion highlights the need for capital standards to be appropriately calibrated to the size, complexity, and business model of financial institutions. A one-size-fits-all approach is seen as detrimental to smaller, relationship-based community banks that are vital to local economies.

This theme is critical as it influences the design of upcoming regulations like the Basel III endgame, determining whether community banks can compete effectively against larger institutions.

Mortgage Servicing Asset (MSA) Capital Treatment

A central topic is the 25% cap on MSAs in the calculation of core capital, which penalizes banks with significant mortgage operations. This rule can force banks to sell off servicing, disrupting local customer relationships and impacting market stability.

Revising the MSA cap is a key opportunity within the new capital proposals to enhance liquidity in the mortgage market and allow community banks to better serve their customers.

Anticipation of Basel III Endgame

Regulators confirmed their plan to introduce the Basel III endgame proposal before the end of March. This upcoming regulation is presented as the primary vehicle for addressing concerns like the MSA cap and implementing broader changes to bank capital standards.

The imminent release of this proposal signals a significant shift in the regulatory landscape, requiring financial institutions to prepare for new capital requirements and engage in the subsequent comment period.

Effectiveness of Industrial Loan Company (ILC) Reforms

The dialogue assesses the 2020 reforms to the ILC regulatory framework. FDIC Chairman Hill affirmed that the changes, which codified historical supervisory practices and strengthened parent company oversight, have been successful in ensuring the safe and sound operation of ILCs.

This confirmation provides clarity on the stability and regulatory view of the ILC charter, indicating that the current framework is considered robust and is likely to remain in place.

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Topics

Bank Capital Rules Basel III Endgame Mortgage Servicing Assets (MSAs)MSA Cap Community Banking Regional Banks Regulatory Tailoring FDIC Federal Reserve Industrial Loan Company (ILC)Financial Regulation Safety and Soundness Risk-Based Capital Parent Company Oversight Mortgage Market Stability

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