Asset-Backed Finance Wins Capital Reprieve From Basel Group

Global banking regulators scaled back plans to boost capital requirements for lenders holding asset-backed bonds after banks warned that an initial blueprint was too harsh and would have curtailed lending.

The Basel Committee on Banking Supervision said that banks could face a minimum capital requirement of 15 percent for securitizations, rather than the 20 percent proposed last year. The group also changed some of the assumptions used to calculate risk, leading to “meaningful reductions in capital requirements” compared with earlier plans, the group said.

The changes were “informed by the committee’s desire to strike an appropriate balance between risk sensitivity, simplicity and comparability,” the committee, composed of central bankers and regulators from around the world, said in a statement on its website today. The updated standards would still be tougher than the status quo, it said.

“The latest proposal follows on from Basel’s earlier statements about acknowledging the good track record of ABS and as such revising capital charges against them,” said Patrick Janssen, a fund manager at M&G Investments in London, which oversees 20 billion euros ($27 billion) of asset-backed securities. “The market was expecting this to come out next year, but with SME lending a big focus and securitization seen as the right tool to enable banks to lend more, I guess they do not want to lose valuable time.”

Risk Sensitive

The draft securitization rules were one of the main points of the agenda at a meeting of the Basel committee this month in Hong Kong. The Basel group has said that it is seeking to make rules “more prudent and risk-sensitive” by setting stricter curbs on how banks should measure possible losses, and by limiting reliance on external credit ratings.

Proposals published last year by the Basel group were “very, very harsh,” Richard Hopkin, head of securitization at the Association for Financial Markets in Europe, said in a phone interview on Dec. 6. “You can certainly destroy the market if you get the capital rules wrong.”

The revisions to the committee’s proposals “reflect the feedback we have received,” Stefan Ingves, chairman of the committee and the governor of Sweden’s central bank, said in the statement.

Meaningful Reductions

The updated plans “would lead to meaningful reductions in capital requirements” compared with “the initial proposals, yet would remain more stringent than under the existing framework,” the Basel group said.

AFME members, including Credit Suisse Group AG (CSGN), BNP Paribas SA (BNP) and Deutsche Bank AG (DBK), urged the committee to ditch its earlier draft on securitizations, warning that the plans would backfire by tying up capital and starving the economy of credit.

“However big a step forward these new proposals may be, they will not kick-start Europe’s high quality securitization market on their own,” Hopkin said today in an e-mailed statement. “Hopefully, we can expect similar recognition of high quality European securitization, and the role it has to play in funding the real economy, in other key regulatory announcements expected soon,” he said, citing EU plans for bank liquidity and insurers.

Regulators have identified the pre-crisis boom in asset-backed bonds as one of the prime causes of the turmoil that followed, as banks struggled with a drop in the value of previously highly rated instruments based on residential mortgage debt.

Lehman Collapse

The size of the global securitization market plummeted after the 2008 collapse of Lehman Brothers Holdings Inc. Some 251 billion euros of bonds backed by everything from auto loans to credit-card payments were issued in Europe in 2012, compared with a peak of 711 billion euros in 2008, according to data from the AFME. U.S. issuance totaled 1.5 trillion euros, down from a 2003 peak of 2.9 trillion euros, according to the data.

The Basel plans include moves to prevent high-quality tranches of securitized debt from facing disproportionately high capital requirements, the group said.

Basel requirements force banks to have a minimum amount of capital, such as shareholder equity, or retained earnings, to cover potential losses on their investments.

“It is important that the securitization market is reinvigorated to provide funding when the central banks exit from QE,” Patricia Jackson, head of prudential advisory at Ernst & Young LLP in London and a former U.K. member of the Basel group said in reference to so-called quantitative easing measures taken to boost the economy.

Capital Rules

While the changes to the capital rules are to be welcomed, regulators should also look at a broader sweep to measures to improve the market, including possibly by moving trading onto exchanges, she said.

In tandem with the push to overhaul capital rules, authorities are also increasingly looking to securitization as a means to boost financing of companies, especially small- and medium-sized businesses, at a time when banks’ lending activity is limited by the need to meet stricter capital and liquidity rules.

“We have a great opportunity now to reshape the securitization sector as a form of market-based financing,” Greg Medcraft, chairman of the International Organization of Securities Commissions, or Iosco, said in a phone interview last month.

Bank Regulators

This “shift of emphasis towards securitization is most definitely linked to lending to SMEs and other credit-starved parts of the economy,” Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland, said by e-mail. “We have seen a few central banks adopt a more lenient approach to securitization and now these moves appear to have been underscored by the Basel committee.”

European Central Bank initiatives to promote lending to small and medium-sized enterprises will spur an increase in sales of asset-backed securities by as much as 15 percent next year, according to a report by Barclays Plc analysts published last month.

The Basel group said that it would consult on the updated plans until March 21, 2014. The deadline for applying the final rules will “provide sufficient time for implementation without the need for grandfathering provisions.”

The Basel committee brings together bank regulators from 27 nations including the U.S., U.K. and Japan to co-ordinate rule-making.

To contact the reporters on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net; Alastair Marsh in London at amarsh25@bloomberg.net

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

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.