With the US economy and the housing market undergoing drastic changes and new regulations about to shake the lending business even further, there's a sense that things are about to go from bad to worse. All eyes are on the Federal Reserve as it holds an open board meeting today to discuss the long-awaited Basel III end-game rollout (Staff Writer, 2023).
This new banking regulation, whimsically named Basel III end game, has nothing to do with sports. Instead, it pertains to banks' lending capital requirements, which have severe implications, particularly for the real estate sector and residential mortgages.
Changes in US Economy and Housing Market
Yesterday, the Federal Open Market Committee (FOMC) held a meeting where all the members unanimously agreed to resume hiking rates, thus raising the FED funds by a quarter point more (FOMC Writer, 2023). The overnight rate now sits between five and a quarter to five and a half percent, the highest in the last 22 years.
However, with Federal Reserve Chairman Jerome Powell's presser, it became evident that this unanimous vote might be the last one. In the future, members may deviate from each other in their decisions.
JPMorgan predicts that the Fed will maintain this rate for nine months. The resulting housing market would have until Q2 2024 before the first rate cut occurs, giving the 550 basis points of rate hikes enough time to impact actual home prices (JP Morgan Writer, 2023).
Impact on the Lending Business: Basel III End Game
This Basel III end game is primarily about how much stricter to make capital requirements or how liquid a bank must always be when writing new loans. The new rules specifically target larger banks, particularly those with assets greater than 100 billion.
As the most exposed sector, residential mortgages will likely see rule changes around residential mortgage capital requirements for larger banks. These changes may make capital requirements stricter than those currently in other regions. The most extensive exposure to residential mortgages includes USB with 33 percent of all loans, CFG bank with 29 percent, and Wells Fargo with 28 percent.
While this might seem like an efficient solution, it has its downsides. The stricter rules could push more lending outside of regulated banks and into the non-regulated shadow banking sector, including companies like BlackRock and KKR.
Implications for the Housing Market
While the housing market may not feel the full effects of these changes in the short term, the anticipation of these rules and the Fed raising the overnight rate again might be enough to pull banks back from granting mortgages liberally.
This tightening of regulations and declining median sale prices for new houses paints a bleak picture of the housing market. New home sale prices have fallen by 16.4 percent from their peak in many parts of the country, and home builders are finding themselves in an increasingly difficult situation.
However, this might be good news for home buyers as the prices of new houses decrease. Ultimately, this shift signals a significant change in the US economy, the housing market, and the lending business that could have lasting effects for years.
Reference:
JP Morgan Writer. (2023, July 11). Mid-year market outlook 2023. https://www.jpmorgan.com/insights/research-mid-year-outlook
FOMC Writer. (2023). Meeting calendars and information. The Fed - Meeting calendars and information. https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
Staff Writer. (2023b). Statement by Travis Hill, vice chairman, FDIC, on the proposal to revise the regulatory capital requirements for large banks. FDIC. https://www.fdic.gov/news/speeches/2023/spjul2723b.html#:~:text=The%20Basel%20III%20capital%20rule,%2C%20clearing%20requirements%2C%20stress%20testing%2C
Comments