As we have previously noted, the Basel Committee is working apace on ending the ability of large banks to use internal models to calculate their regulatory capital. In this update, we turn to Basel’s latest proposal which blasts models still more thoroughly from Basel’s planet by disallowing their use for many asset classes (e.g., exposures to private-sector financial institutions and large corporates) and allows them under conditions sure to raise the capital bar in certain other classes (e.g., mortgages). As detailed below, this new framework – which the FRB supports – would further tilt the U.S. capital system away from reliance on PLS and private MIs into a two-tiered system in which low-risk loans are sold to the GSEs or Ginnie and higher-risk, higher-return ones are held in portfolio.

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