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Yesterday, Thomas Piketty and his colleagues released a sweeping report surveying the extent of global and national economic inequality.  Charles Dickens would be inspired – Ebenezer Scrooge’s third ghost portending a landscape of poverty, grief, and desolation has nothing on the French economist.  Like Jacob Marley’s specter, these economists show a grim future for a critical reason:  it does not have to happen.  Although there are many causes of the strong currents driving America’s wealthiest households far from the many more struggling beneath them, monetary and financial policy play a significant, widely-overlooked or even rejected role.  The Federal Reserve must, like Scrooge, look ahead, take heed, and change.

Read more: Karen Petrou on Christmas Future and the Federal Reserve 

In this report, we examine today’s House FinServ Monetary Policy and Trade subcommittee hearing on reforming CFIUS while preserving what all members considered to be the important role of foreign investment.  Chairman Barr (R-KY) indicated that this will be the first in a series of hearings and many members on both sides of the aisle pointed to rising Chinese technology acquisitions as justification for reviewing whether CFIUS has adequate authority and resources.  The Chairman also praised legislative efforts by Sen. Cornyn (R-TX) and Rep. Pittenger (R-NC) to reform the committee.  Rep. Pittenger argued that his legislation would enhance scrutiny of Chinese acquisitions without singling the country out and said that members of the Trump administration support the approach.  While Rep. Heck (D-WA) criticized Treasury as once unresponsive to his calls for reform, it is now engaging constructively.  He also pushed for legislation expanding CFIUS authorities.  Rep. Sherman (D-CA) called for CFIUS to consider foreign control of industries rather than just ownership and Rep. Hill (R-AR) called for greater scrutiny of technology licensing agreements.

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In conjunction with finalizing numerous contentious aspects of the Basel III Accord, the Basel Committee has completed revisions to the global leverage-ratio (LR) standard for both all internationally-active banks and GSIBs.  The new standards retain much in Basel’s prior approach (e.g., the controversial three percent LR and 2018 implementation date), but make significant changes in the way complex derivatives and similar obligations are treated in the LR denominator.  Capital treatment is generally liberalized over the prior approach, although the new standards retain the earlier coverage of clearing positions and central-bank reserves that make the LR considerably more costly for many banks.  The new standards also establish the GSIB leverage surcharge after the initial, vague proposal.  For GSIBs outside the U.S, this LR surcharge could be another, costly element of the LR framework.

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In this analysis, we begin our assessment of the final global regulatory-capital accord reached last Thursday after much gnashing of teeth.  We start with our assessment of the final approach to the leverage ratio (LR) because this is often the binding constraint on large-bank mortgage operations whether they pertain to origination, securitization, or RMBS trading.  The most important aspect of the new global LR is not the ratios – still well below those applicable to large U.S. banks.  Rather, it’s the new denominator, which the U.S. has pledged to reflect in its own requirements.  The revised approach should make it considerably easier for large banks to hold most mortgage-related derivatives and – critical to the future shape of U.S. housing finance – also play a far larger role in mortgage credit enhancement and tranched securitizations.  However, new entrants and monoline MIs face new challenges.

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