Banks Question Basel III’s Exclusion of Mortgage Insurance from Risk Weights

The Basel III endgame proposal is intended to align banks’ capital requirements more closely with asset risk. Private mortgage insurance (PMI) absorbs part of the loss when a borrower defaults. If mortgage risk weights do not reflect that protection, banks must hold more capital and may be more inclined to sell mortgages to Fannie Mae or Freddie Mac instead of retaining them on their balance sheets.

The Federal Reserve, Federal Deposit Insurance Corp. (FDIC) and Office of the Comptroller of the Currency (OCC) jointly proposed revised rules on March 19, 2026. The proposal assigns more granular risk weights to residential mortgages based on loan-to-value (LTV) ratios but explicitly excludes PMI. Regulators are seeking comment on whether to recognize PMI in full or count only 50% of its protective value, with comments due June 18. Bankers questioned the approach in an April 24 report.