Banks May Win Basel Reprieve for Simple Asset-Backed Debt

Banks buying asset-backed debt may win a limited reprieve from planned tougher capital rules if the securities are judged to be straightforward.

The Basel Committee on Banking Supervision, a global group that sets ground rules for lenders, may adjust draft plans so that “simple” securitizations meeting certain criteria get a lighter treatment, according to Uldis Cerps, executive director for banking at Sweden’s Financial Supervisory Authority and a Basel member.

“The general securitization framework is pretty balanced, taking into account the concerns of the stakeholders,” Cerps said yesterday in an interview in Stockholm. “There is at present some work being done on how one could look at simple securitization. We have not yet taken any specific decisions, but it is something that the committee, as I understand, will look at,” he said, declining to provide further details.

Lenders from Barclays Plc (BARC) to Deutsche Bank AG (DBK) have attacked Basel proposals published in December for overhauling rules on how much capital banks must have to cover potential losses on securitized debt, warning that the tougher standards run counter to a parallel push by some regulators to revive the market. The Basel committee has said its goal is to come up with standards that reflect real risks.

Lessons Learned

The draft rules “for higher-quality ABS may still be perceived by investors as conservative, particularly when compared with similar asset types,” the European Central Bank and Bank of England, two of the regulators pushing for a revival of securitization, said in May.

“I know there are still many people who are not satisfied with the risk weights, but the framework reflects in a sensible way the discussions we have had and to a sufficient extent reflects the lessons drawn from the previous crisis,” Cerps said.

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. Authorities 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.

Still, the ECB said in June that it would “intensify preparatory work related to outright purchases” of asset-backed debt in a bid to stimulate the euro-area economy.

Auto Loans

“It would be sensible to look at whether banking policy, securities policy, and accounting policy on the ABS market fit together coherently, and I’m not sure that it does,” Paul Tucker, a former deputy governor of the Bank of England, said in an interview with Bloomberg News this week in Salzburg, Austria.

About 181 billion euros ($240 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, the data show.

While Basel may consider the option of special rules for simple securitized structures, “it hasn’t decided yet what it will do,” Cerps said.

It is still looking at “if there is a specific need to design other simpler forms of securitization and if those simple forms would warrant an even lower risk weight than currently allowed for,” he said.

The Basel group brings together regulators from 27 nations including the U.S., U.K and China to coordinate their bank rules.

The group has said it will publish the final version of its securitization rule overhaul “within an appropriate timeframe, and provide sufficient time for implementation.”

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net; Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net

To contact the editors responsible for this story: Tasneem Hanfi Brogger at tbrogger@bloomberg.net; Patrick Henry at phenry8@bloomberg.net Patrick Henry

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to 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.