Both of these factors also have obvious implications for mortgage pricing. From economic and financial stability perspectives, high levels of non-performing loans tie up capital and operational capability, which may otherwise be used in more productive ways. Furthermore, the uncertainty of banks’ balance sheet strength and the subsequent reduction in market confidence make them more vulnerable to funding shocks.
Concerns about setting a potentially inappropriate regulatory standard were an important factor in the decision by the banking agencies several years ago not to incorporate interest rate risk and asset concentration risk into the formal risk-based capital standards.