We have reviewed the final U.S. Basel II.5 rules which, while revised from the proposal, pack the same punch we foresaw: a punitive bank-regulatory capital regime that, for all the talk of a return of private capital to mortgage securitization, kills off MBS without a GSE or USG backstop, especially when these rules are considered in light of the risk-retention framework. The only exception to this could come from MBS guaranteed by banks, either directly or in covered bonds, but the chances for even this are, at best, iffy. While surprising, these results are not, we believe, inadvertent: U.S. regulators don’t much like securitization and, to the extent these rules squash them, so much the better in their view.
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