Basel Seeks Tougher Bank Capital Rules for Securitizations

Banks trading asset-backed securities may face tougher capital requirements and stricter oversight from global supervisors amid concerns that regulation is failing to curb excessive risk-taking.

The Basel Committee on Banking Supervision said today that it would seek views on how securitization is regulated in a bid to make it safer.

Regulators started a “fundamental review” of the capital requirements, the group said in a statement on its website. Rules for securitized debt should be “more prudent and risk sensitive,” it said.

The boom in the U.S. and European markets for securitized debt in the years leading up to 2008 was seen by regulators as one of the main reasons for the collapse of Lehman Brothers Holdings Inc. and the ensuing financial crisis, as lenders struggled with a plunge in the debt’s market value.

Securitization has also been the subject of lawsuits, amid accusations that some instruments were flawed or even designed to incur losses.

An asset-backed security is a financial product whose value derives from a pool of assets such as loans or credit-card debt, rather than mortgages. The term securitized debt covers ABS as well as insruments based on home-owner loans.

The Basel group’s draft proposals would overhaul the way banks measure the risk of losses on securitizations, and so calculate the financial reserves that must be held against them. The plans include setting a floor for the minimum amount of capital banks must hold against such securities.

Risk Weights

The Basel committee sets capital requirements for banks that are worked out as a percentage of a lender’s assets. Before doing the calculation, the bank should discount or mark up the assets according to their riskiness. Safer assets are meant to have a lower risk weight.

The group’s proposals would ban banks from weighting securitized debt at less than 20 percent of its value, so preventing lenders from minimizing the amount of capital they must hold against the securities. At present, the 20 percent floor only applies to some lenders.

Still, the plans also include capping the amount of capital that lenders should have to hold against securitized debt. Basel rules already set a “maximum capital charge” for securitized debt that banks buy. Under today’s plans, such limits would also be applied to banks that create or sponsor securitizations.

Impact Assessment

The Basel committee will conduct an impact assessment of the planned changes “in the coming months,” it said. The group is seeking views on the measures until March 15.

In 2011, new securitized debt issuance in the U.S. was $124 billion, down from a 2006 peak of $753 billion, according to data compiled by the Securities Industry and Financial Markets Association. A lack of bank-capital rules may have led to the securitization boom before the crisis, according to the International Organization of Securities Commissions.

New issuance in Europe totalled 228 billion euros ($302 billion) in 2011, according to the Iosco report. This is down from a peak of more than 700 billion euros in 2008. The European Union nations responsible for the largest issuance of securitized debt are the Netherlands, U.K., Spain and Italy.

The Basel plans also include cutting banks’ reliance on assessments given by credit-ratings companies to calculate the capital they should hold against securitized debt.

The new rules would reduce “mechanistic reliance” on external credit ratings, the group said. The 2008 financial crisis had revealed that such assessments “often did not adequately reflect the risk,” the group said.

The push on securitization adds to the Basel group’s list of priorities as it seeks to set liquidity rules for lenders, overhaul capital rules for assets banks intend to trade before maturity, and update limits on the amount of business a financial firm can do with a single counterparty.

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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