The Recourse Rule
2009-09-19 · Original WordPress address
I want to know if this is true:
Under the Recourse Rule, an AA- or AAA-rated asset-backed security, such as a mortgage-backed bond, received a 20-percent risk weight, compared to a zero risk weight for cash and a 50-percent risk weight for an individual (unsecuritized) mortgage. This meant that commercial banks could issue mortgages—regardless of how sound the borrowers were—sell them to investment banks to be securitized, and buy them back as part of a mortgage-backed security, in the process freeing up 60 percent of the capital they would have had to hold against individual mortgages. Capital held by a bank is capital not lent out at interest; by reducing their capital holdings, banks could increase their profitability.
Is it true that this is what the rule change required and is it true that this is how banks responded? Also, is there a way to quantify the impact of this rule change (assuming this paragraph is a correct summary of what happened)?