Companies that insure banks’ mortgage debt should undergo regular stress tests and build up bigger capital buffers to bolster their resilience to crises, global regulators said.
The Basel Committee on Banking Supervision, in tandem with global market and insurance regulators, said mortgage insurers should be required to build up long-term reserves that could be tapped when defaults peak, and should face tougher oversight.
Mortgage insurance is “subject to significant stress in the worst tail events,” the regulators said in a report today. The failure of an insurer would see increased costs fall on lenders “at the very time that the insurance would be most needed, potentially creating systemic risk.”
The collapse of the subprime mortgage market was one of the major drivers of the global financial crisis in 2007. The turmoil prompted a push by regulators to make the market more robust and a series of probes into how banks constructed and sold securities underpinned by this debt.
Mortgage insurance is widely used in only a few nations, including the U.S., Canada, France and Australia, according to the report. In Canada and Hong Kong, insurance is mandatory on high loan-to-value mortgages, while in the U.S. Fannie Mae (FNMA), Freddie Mac (FMCC) and other government-sponsored housing enterprises require it on loans they purchase with LTV above 80 percent, according to the report.
U.S. authorities this month sued Bank of America Corp. (BAC), the nation’s second-biggest lender, accusing it of misleading investors in an $850 million mortgage-backed bond, while Fabrice Tourre, a former Goldman Sachs Group Inc. (G) vice president, was found liable for fraud in a failed $1 billion investment involving securitized mortgage debt.
The Basel committee brings together banking regulators from 27 nations including the U.S., U.K. and Japan. It prepared the report in partnership with the International Organization of Securities Commissions, made up of market regulators, and the International Association of Insurance Supervisors. The groups’ report sets out a series of recommendations to national authorities.
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