In this analysis, we begin our assessment of the final global regulatory-capital accord reached last Thursday after much gnashing of teeth. We start with our assessment of the final approach to the leverage ratio (LR) because this is often the binding constraint on large-bank mortgage operations whether they pertain to origination, securitization, or RMBS trading. The most important aspect of the new global LR is not the ratios – still well below those applicable to large U.S. banks. Rather, it’s the new denominator, which the U.S. has pledged to reflect in its own requirements. The revised approach should make it considerably easier for large banks to hold most mortgage-related derivatives and – critical to the future shape of U.S. housing finance – also play a far larger role in mortgage credit enhancement and tranched securitizations. However, new entrants and monoline MIs face new challenges.
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