Building on our initial, high-level analysis of the new FHFA capital proposal, we here go in depth into a critical part of FHFA’s structural redesign: the relationship of the risk-based capital (RBC) weightings to the newly beefed-up leverage ratio (LR). We do so before assessing the new definitions of capital, the capital-conservation and systemic buffers, and much more because knowing which rule is the binding constraint is a first-order conclusion before moving on to knowing which rule bites whom how. If the LR triumphs — as it may no matter FHFA’s hope that it won’t – then the incentives built into the complex RBC paradigm will be of considerably less strategic import. GSEs will still be different post-conservatorship, but they’ll be differently different.
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