Near-Junk Rated Securities Studied in EU Plans to Curb Risk

European banks may be allowed to use near-junk rated securities to reduce the amount of reserves they hold against potential losses, under draft capital rules being considered by the European Union to reduce risk.

Banks could accept “debt securities constituting securitization positions” rated as low as BBB- by Fitch Ratings and Standard and Poor’s, or Baa3 by Moody’s Investors Service, as collateral from debtors to minimize the amount of capital they need to hold in reserve, according to a draft European Commission document obtained by Bloomberg News. The ratings are the lowest investment-grade rankings that the companies confer on securities.