U.S. regulators have mobilized themselves to implement the Basel II.5 rules finalized in August 2009 to update the capital rules governing market risk and complex securitizations. The U.S. rules differ in several significant respects from the global ones, with the Dodd-Frank prohibition on rating-agency reliance a major stumbling block for the U.S. that might provide a short-term reprieve for GSE obligations. However, we don’t think it will last, and the overall tough standards in these rules – piling on, of course, to all the other tough capital and liquidity requirements – will reduce MBS holdings, even from GSE issuers, and dampen the fun banks might have hoped to enjoy from the GSE exception built into the Volcker Rule’s ban on other types of proprietary trading. The only good news for the GSEs is that here, as with all the other rules, private securitizations will be at an even greater disadvantage (at least as long as GSE paper is considered agency, not private, issuance).


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