Risk-Based Capital for Direct Credit Substitutes

Financial institutions that invested in certain mortgage-backed and asset-backed securities, or MBS and ABS, have seen another aspect of the financial crisis emerge – rapidly increasing risk-based capital requirements. Given the pre-crisis mortgage landscape filled with innovative mortgage products, historically low delinquency and loss levels, and a relatively flat yield curve, the issuance of private-label (or non-agency) mortgage-backed debt experienced significant growth.