- Community banking organizations (CBOs)_ rely primarily on relationship banking, funding local loans through local deposits. Mortgage lending is an important component_ in the CBO business model, providing essential services to households through the origination and servicing of loans secured by residential real estate.
- Loans secured by 1-4 family residential properties as a percentage of Tier 1 capital and allowance for credit losses (ACL) have stabilized for CBOs at 136 percent. This is up from a low of 118 percent in 2022 but below 2015 levels when the Basel III capital framework was implemented in the U.S.
- When a loan is sold but the bank retains the servicing, a mortgage servicing asset (MSA) is recognized on the balance sheet. MSAs as a percentage of common equity Tier 1 capital (CET1) grew beginning in 2020, coinciding with increases in the deduction threshold for CET1._ After peaking at a high of 1.04 percent in 1Q 2022, MSAs have declined to 0.66 percent as of 4Q 2025.
Endnotes
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1 Community banking organizations are defined as having less than $10 billion in total assets
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2 See “External LinkRevitalizing Bank Mortgage Lending, One Step with Basel” for related remarks by Vice Chair for Supervision Michelle Bowman
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3 Elimination of the deduction for covered banking organizations is currently under a External Linkproposed rule
The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
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