In this report, FedFin builds on our assessment of the overall U.S. Basel III framework to evaluate key aspects of the standardized risk-based capital requirements. Although banks and BHCs over $250 billion in assets must use the advanced approaches (generally not analyzed here), the standardized weightings now serve as a floor for them and, thus, create a new set of minimum risk-based capital requirements applicable across the industry in the U.S. The proposed rule revised these from the global Basel III rules in part because U.S. law now bars reliance on rating agencies. Thus, for example, sovereign risk weightings now are based on a classification system that preserves zero risk-weighted asset (RWA) treatment for the U.S, possibly creating incentives to hold these assets – favored under pending liquidity rules – despite the high cost now applied and soon to rise even higher across the board to assets under the new leverage rule. Also due to the lack of ratings, corporate obligations now have a generally higher RWA, creating potential distortions in wholesale commercial finance discussed below. Residential mortgages, however, are not subject to any changes in their RWAs, reflecting strong opposition from community banks to the proposed, much tougher approach. However, as proposed, the final rules take a strong stand on asset securitization, imposing stiff new capital charges on complex structures that could sharply reduce demand for private-label MBS, other asset-backed securities (ABS) and synthetic structures.
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