Basel to Toughen ABS Capital Rules Over Banks’ Objections

The Basel Committee on Banking Supervision is set to stiffen capital requirements for securitized debt, putting aside lenders’ objections, according to two people familiar with the regulator’s plans.

The Basel committee will stick close to a December 2013 proposal that set out tougher rules for how banks model risks associated with asset-backed securities, said the people, who requested anonymity because the plans are private.

Lenders such as Deutsche Bank AG and Barclays Plc argued that the Basel proposal would lead banks to shun investments in asset-backed debt. That could frustrate the European Central Bank’s efforts to revive the ABS market, with the ECB set to begin making purchases as soon as today.

“We’re waiting for the BCBS rules in December, which I expect to be dreadful, worse than the current framework,” Alexander Batchvarov, head of international structured finance research at Bank of America Corp., said in Frankfurt on Nov. 17.

The Basel committee will leave the door open for further talks on possible special treatment of ABS that meet yet to be determined quality criteria, the people said. Banks create ABS by bundling individual loans such as mortgages, auto credit and credit-card debt into tradable bonds.

The regulator meets next month, and is set to complete work on the measures by early next year.

Financial Turmoil

Basel’s stated goal is to come up with standards that better reflect real risks in response to the financial turmoil that followed the 2008 collapse of Lehman Brothers Holdings Inc. The Basel committee declined to comment on the capital rule talks.

The draft plans published last year include a minimum 15 percent risk weighting that would be attached to purchases of ABS, acting as a limit on how low capital requirements could fall, and changes to current approaches used by banks to calculate the likelihood of losses.

The group has said that it will allow “sufficient time for implementation” of the rules. Last year’s blueprint would be “more stringent” than the existing framework, it said.

While the Basel committee has been carrying out its capital rule overhaul, the ECB, the Bank of England and other EU authorities have been pushing to revive the ABS market as a way to boost lending to businesses. ECB President Mario Draghi has also called for regulatory changes.

The ECB has prepared its ABS purchase program independently of any timetable for possible regulatory changes, Draghi said in September.

Covered Bonds

“Some regulation has changed, by the way, already, for the better, in the sense of treating ABS of a certain type better and in a less discriminatory way if compared with similar instruments like covered bonds, but these changes are not enough,” Draghi said.

Securities eligible for purchase by the ECB may include bonds backed by residential or commercial mortgages as long as they fulfill the criteria listed in a legal act published yesterday, the ECB said.

About 181 billion euros ($227 billion) of bonds backed by everything from auto loans to credit-card payments were issued in Europe in 2013 compared with a peak of 818 billion euros in 2008, according to Association for Financial Markets in Europe data. U.S. issuance totaled 1.5 trillion euros, down from a 2003 peak of 2.9 trillion euros, the data show.

Banks argued that the Basel draft plan would hamper the EU’s efforts to boost economic growth.

‘Affordable Credit’

“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 draft Basel plans in March. The rules risk being “very punitive,” the lender said.

The Basel committee blueprint 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, dated March 21. A bank spokesman declined to comment further.

The European Commission, the 28-nation EU’s executive arm, has already proposed technical rules in the areas of bank liquidity rules and capital requirements for insurers that are partly aimed at supporting the recovery of the ABS market.

In parallel with the Basel work on capital, an international task force of banking and market regulators is working on defining criteria for “simple, transparent and consistent” ABS, with a final report to come next year.

Task Force

While the Basel group will publish its capital standards ahead of the completion of this other international work, it will leave the door open to incorporating the task forces’ findings into its requirements, according to the people familiar with the discussions.

“While the next round of Basel capital rules are unlikely to significantly change compared with what we’ve already seen, at least there will be that possibility for them to go back and have another look at it once there are agreed criteria for simple, transparent and coherent ABS,” said Simon Hills, an executive director at the British Bankers’ Association.

The Basel committee brings together regulators from around 30 nations, including the U.K., U.S. and China, to co-ordinate standards for banks. Its members include the U.S. Federal Reserve, Bank of England and the European Central Bank.

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