The Capital Rules to Come
Following its morning meeting, FSOC late Friday released the staff statement expressing its near-term decision on systemic risk in the secondary mortgage market. Although the Council decided against designating Fannie and Freddie or market practices, this is conditional – FHFA’s capital rules must stay tough and come with new prudential standards or the Council will start designating. Given current political realities, this may prove a hollow threat, but we think it’s meaningful – a new FSOC won’t act fast, especially in the face of strong Fed opposition to relaxing finalized standards covered by Administrative Procedure Act protections. Sunk costs create new realities. Considerable focus on competitive equity has also created a window for softening current capital constraints on bank CRT activities – changes that pose both challenge and opportunity to nonbank credit enhancers.