Bank Regulation and Mortgage Market Reform

Abstract

The goal of this paper is precisely to consider how the banking regulation and mortgage market reforms could and should interact. In doing so, I take as the starting point, on one hand, the bank regulation initiatives already present in the Dodd-Frank Act and the Basel III proposal, and on the other hand, the mortgage market reform principles presented in the Treasury/HUD (2011) White paper. I then consider what additional reform elements should be considered in view of the interaction of bank regulations and mortgage market activity. The paper is organized as follows. In Section (2), I provide an overview of the failed U.S. bank regulation system that has been in place for approximately the last 20 years, and identify the key components of bank regulation that created the systemic dimensions of the subprime mortgage losses. In Section (3), I analyze the Treasury/HUD White Paper proposal and identify the primary issues it raises for regulatory reform. In Section (4), I compare securitization with covered bonds and analyzes the appropriate regulatory rules if mortgage-backed covered bonds are to become an important element of the U.S. mortgage markets. The positions I take on securitization and covered bonds are at variance with some parts of the Dodd-Frank Act and the current policy position of the Federal Deposit Insurance Corporation (FDIC). Section 5 summarizes the key components of bank regulation and mortgage market reform that must be in place if the full reform package is to be successful.