We have completed our assessment of the details of the final Basel III capital rules, which were released last month in conjunction with the final Basel III liquidity standards.  As we’ve said in the past when drafts of these strategic rules were released, the global standards will have significant impact on Fannie Mae, Freddie Mac and the FHLBs.  This comes in part because of the rewrite set for their own regulatory capital following systemic designation, but most importantly because the new capital and liquidity incentives will determine the value of GSE and GSE-successor activities in the restructured U.S. housing-finance system to come.  In this report, we assess the new global standards and their implications for U.S. residential-mortgage finance.  We conclude that arbitraging the new risk weightings for mortgage assets is the name of the new housing-finance game, meaning that private successors to the GSEs will succeed only if their MBS carry a federal or robust private backstop big enough to afford reduced regulatory-capital requirements. Much in the new rules is aimed at shutting down structured finance.  As a result, the shadow demand for agency MBS as collateral for other transactions will drop dramatically, although the final liquidity rules (which we’ll address in a subsequent client report) offset this to some degree.

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