Banks Urge Basel U-Turn on Global Asset-Backed Debt Rules

Photographer: Jasper Juinen/Bloomberg

Michel Barnier, the EU's financial services chief, has said that low-risk asset-backed debt should get favorable treatment from regulators. Close

Michel Barnier, the EU's financial services chief, has said that low-risk asset-backed... Read More

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Photographer: Jasper Juinen/Bloomberg

Michel Barnier, the EU's financial services chief, has said that low-risk asset-backed debt should get favorable treatment from regulators.

Banks from Deutsche Bank AG to Barclays Plc (BARC) attacked proposals to overhaul global capital rules for asset-backed debt, saying they risk choking securitization while clashing with efforts to boost lending to businesses.

Proposals by the Basel Committee on Banking Supervision would be so onerous for some securitizations that banks would shun investments in the debt, according to consultation responses published on the group’s website.

“Left unchanged, the proposed rules would substantially reduce the incentives for banks to participate in securitizations” and could hamper “the availability of affordable credit to the wider economy,” Deutsche Bank said in its public response to the Basel group. The rules risk being “very punitive,” Europe’s biggest investment bank by revenue said.

Limiting Bank Leverage

Basel regulators have been grappling with how to set capital rules for asset-backed debt since the market collapsed in the wake of the 2008 bankruptcy of Lehman Brothers Holdings Inc. While the Basel group has focused on ensuring banks have enough capital to cover risks from their holdings, other authorities have focused on ways to revive high-quality securitizations.

The Basel committee’s proposals published in December would constrain banks’ ability to minimize the capital they must hold to absorb losses on asset-backed debt. The group has said that the rules would be “more stringent than under the existing framework.”

Economic Turmoil

Central banks and lawmakers identified the pre-crisis boom in securitizations 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.

The Basel committee approach fails to draw enough of a distinction “between asset classes that performed well during the credit crisis and those that did not,” Barclays said in its response to the Basel plans.

London-based Barclays declined to comment beyond its submission, while Deutsche Bank (DBK) declined to immediately comment.

Other banks seeking changes to the Basel approach include UniCredit SpA, Credit Suisse Group AG (CSGN), and the Japanese Bankers Association.

The Basel committee said in an e-mail that it will consider the issues carefully and declined to comment on specific points made by individual lenders.

Underlying Loans

“As long as regulators penalize securitizations just because they are securitizations and not because the resulting instrument is indeed riskier than underlying loans, credit markets like small business and infrastructure in the EU and mortgages in the U.S. that need secondary markets will struggle,” Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc., said in an e-mail.

The Basel committee in its December proposals ruled out having a system where capital requirements for asset-backed debt simply mirror those that would apply to the underlying assets.

“Securitizations have a wide range of structural features that do not exist for banks holding the underlying pool outright and that are impossible to capture in models,” the committee said.

Auto Loans

Some 180 billion euros ($247 billion) of bonds backed by everything from auto loans to credit-card payments were issued in Europe in 2013 compared with a peak of 711 billion euros in 2008, according to data from the Association for Financial Markets in Europe. U.S. issuance totaled 1.5 trillion euros, down from a 2003 peak of 2.9 trillion euros, according to the data.

In parallel with the Basel effort to improve capital rules, authorities including the European Central Bank and the Financial Stability Board, a regulatory group set up by the G-20, are looking for ways to resurrect some of the lost funding to ease constraints on businesses.

The European Commission said last month that increased securitization could allow banks in the 28-nation European Union to expand their lending and bolster the role of other institutional investors in financing businesses.

High-Quality

There “is more room to maneuver than is generally recognized” for granting high-quality securitizations favorable regulatory treatment, Yves Mersch, a member of the ECB’s executive board, said in a speech yesterday. “What is key however is that action is taken soon.”

Investors “will not simply grin and bear higher risk weights -- they will simply put their money elsewhere, and fund growth in other asset classes that are not being treated so strictly but where investment may not be, from a macroeconomic perspective, as desirable,” Mersch said.

The EU could take its own measures and then review them “should the Basel committee reach an agreement on a similar framework,” he said.

Banks’ minimum capital requirements are calculated as a percentage of their assets, with the value of the assets weighted in line with their riskiness.

The Basel committee’s work includes setting minimum standards to prevent banks setting these so-called risk-weightings at too low a level, and so not having enough capital.

Michel Barnier, the EU’s financial services chief, has said that low-risk asset-backed debt should get favorable treatment from regulators.

The commission will work with other EU authorities “to find a clear distinction between what I’ve called good and bad securitization,” he said in an interview in Athens last week.

Pre-Crisis

“I have no hostility in principle to securitization,” Barnier said. “We wouldn’t be practicing it, of course, in the same way we have seen happen on the other side of the Atlantic,” he said, referring to the pre-crisis market for structured debt based on sub-prime mortgages.

The Basel committee, which brings together regulators from 27 nations including the U.S., U.K. and China to coordinate rules for banks, is seeking to finish work on the rules this year, according to the group’s Chairman Stefan Ingves. Basel requirements seek to ensure that banks have enough capital to withstand a crisis.

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

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net Peter Chapman, Jennifer Joan Lee

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