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By Owen Sanderson
LONDON, Dec 19 (IFR) - Market participants warned this week
that a new consultation launched by the Basel Committee on
securitisation fell into the same traps as previous initiatives.
Securitisations are backed by a huge variety of different
claims, but the framework treats everything presented in
securitised format as being part of the same asset class. The
new paper aims to change the amount of capital banks hold
against securitisations, despite the fact that current capital
levels were only agreed in 2009 and will be further changed when
Basel III is implemented.
Furthermore, it comes as the Financial Services Board aims
to look again at securitisation as part of its shadow banking
reforms, a project it only started late last year.
Market participants warned that there was much technical
detail contained in the proposed new framework as well as other
"There is also initial concern that once again policymakers
may have fallen into the trap of characterising all
securitisations with the poor performance of certain markets
during the crisis, namely US subprime and CDOs," said Richard
Hopkin, a managing director at the Association for Financial
Markets in Europe.
One senior securitisation lawyer said: "Outside the
securitisation framework, SME risk and mortgage risk are treated
completely differently, but once you put them in a
securitisation, for regulatory purposes, they become the same."
NOT ALL NEGATIVE
The market will find some parts of the paper welcome,
however. The release with the paper acknowledged "The Committee
is well aware of the trade-off between the risk posed by
securitisation and its function as an important tool for bank
funding and liquidity."
The high level aims of the paper also chime with themes that
the industry has repeatedly raised. Basel's Committee for
Banking Supervision said it wanted to reduce cliff effects -
where small changes in credit quality or rating can result in
large capital requirement changes, and therefore price
volatility - and reduce reliance on credit ratings.
Meanwhile, the Committee's proposal to reduce risk-weights
at the bottom of the capital structure could be a positive.
All non-investment grade securitisations were weighted at
1250% (formerly 1250% risk weight or a deduction from capital,
at the bank's choice), creating a "cliff", with many trading
desks unwilling to hold inventory in these names.
Under the new proposals, non-investment grade
securitisations can be weighted anything from 153% up to 1250%,
depending on seniority and thickness of the tranche. Below CCC-,
all tranches get 1250% weighting.
DEVILS AND DETAILS
Although the new proposals address cliff effects within the
securitisation market, they do nothing to deal with the cliff
effects created by moving in and out of securitisation
treatment. At the other end of the scale is a cliff between
securitisation treatment and resecuritisation - the
securitisation of a securitisation.
This is intended to deal with the notorious CDOs of ABS, but
could easily catch ABCP conduits or certain forms of commercial
real estate securitisation - fairly vanilla forms of real
And while the proposals are positive for non-investment
grade securitisations, the changes are less welcome for
Senior tranches of Triple A rated securitisations are given
a 7% risk weighting today but this will be increased to 20%,
which will become a floor for all securitisations.
The second major aim appears to be encouraging banks to rely
less on rating agencies, but without pushing them to use
sometimes over-optimistic internal models.
The floor on capital requirements, and much closer alignment
between the Standard Approach (which uses ratings) and the
Internal ratings Based Approach (which uses internal models) is
supposed to stop banks being able to arbitrage regulatory
The Basel paper considers two possible "hierarchies" for
calculating capital. A hierarchy means a bank must start with a
particular method to work out the capital requirements, unless
various conditions prevent it using this, in which case it moves
to the next method in the hierarchy.
However, ratings still feature heavily in both Basel
alternatives, despite the declared aims of the paper. In the
first option, banks could still end up using a Revised Ratings
Based Approach - which requires two rating agencies to rate
exposures, rather than one as before.
In the second option, banks would have to distinguish
"senior high-quality securitisation exposures" from others. The
Basel paper says this could be done for securities with long
term credit ratings of AAA to AA-.
It does acknowledge that "if jurisdictions permit or require
external credit ratings to be the main driver in the
determination of whether a securitisation exposure were
high-quality, in practice, the reduction in reliance on external
ratings would not be as significant as intended."
As a backstop to both methods, regulators will be given
greater powers to ensure consistency. For example, where banks
could choose to use the "high-quality" framework for their
securitisation, "the decision as to which approach to use would
be based on an internal policy whose main intention is not to
minimise capital requirements". A bank would have to justify
changes in methodology to its regulator.
Under the first alternative, if a bank does not use the
Modified Supervisory Formula approach (at the top of the
hierarchy), it must explain its decision.
"Under both hierarchies, supervisors could restrict or
prohibit the use of the supervisory formula approaches," the
(Reporting By Owen Sanderson, Editing by Helene Durand and