In this report, we follow up our earlier analyses of the U.S. “enhanced supplementary leverage ratio” and its impact on the agency and broader mortgage markets.  Since the new rule is pretty much the same as the proposal, our prior analysis stands for the near term.  However, as we also noted, the Basel Committee has recently revised the denominator on which these high U.S. ratios are based.  The final U.S. rule will be revised to parallel Basel following a separate rulemaking also announced with the final leverage regulations. This report thus factors in the new denominator to assess the leverage rule’s impact now and as it may soon be.  We conclude that covered BHCs and banks will arbitrage the new rules where they can, taking more risk both in portfolio and their trading books, while more traditional mortgage finance will continue its flight to “shadow” entities exempt from these stringent rules.

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