The $7 Trillion Collateral Question
Fannie, Freddie and the FHLBs have many unusual characteristics, but unique to them is their function both as originators of assets eligible for an array of financial-market collateral purposes and as major users of collateral for their own capital-markets operations. As of the end of the first quarter, the magnitude of their outstanding issuances – $7 trillion of paper eligible as collateral – makes the GSEs particularly important players as global regulators contemplate the forthcoming struggle by regulated firms to post ever-increasing amounts of collateral to comply with tough new liquidity and trading rules. Fannie and Freddie also play a critical role in central-bank monetary operations, a huge one in the U.S. due to current accommodative policy – a factor that puts them even more into the fray as collateral demands ramp up. Here, we assess current global regulatory initiatives and their impact on the housing GSEs now and to come.
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