Asset-Backed Debt Wins Targeted Capital Reprieve From Basel

  • Committee says ‘modest reduction’ in capital warranted
  • Rules apply to senior parts of simple, transparent securities

Global banking regulators softened capital requirements for some asset-backed securities as they look to jump-start lending while guarding against a repeat of the 2008 financial crisis.

The Basel Committee on Banking Supervision said a “modest reduction” in capital should be allowed for bonds made up of lower-risk assets. The regulator, whose members include the European Central Bank and U.S. Federal Reserve, said in a statement on Monday that minimum risk weights could be cut to 10 percent from 15 percent for the safest portion of the securities.

The lower capital charges will apply to the senior-ranking portions of bonds backed by assets that meet regulators’ criteria for so-called simple, transparent and comparable securitizations. The revised criteria rule out lower capital charges being applied to bonds backed by riskier assets, the committee said.

Basel’s updated securitization framework will come into effect in January 2018. The committee sets standards that are then implemented by regulators around the world.

Cash Flows

Regulators in Europe have looked to securitization markets, where lenders package assets and then sell investors bonds backed by the cash flows, as a way to boost growth by reviving lending to small companies. Rules put in place since 2008 have bolstered oversight of asset-backed securities after bonds backed by subprime mortgages soured in the financial crisis and spread risk through the system.

European Union regulators and lawmakers are currently debating legislation to create a capital markets union in an effort to boost lending to companies that have traditionally borrowed directly from banks. The European Commission, the EU’s executive arm, proposed a plan last September in a bid to deliver as much as 150 billion euros ($166 billion) of new lending and diversify funding sources for companies traditionally reliant on banks.

The European Parliament is considering how much of a security must be retained on the books of the firm that originates the deal. Lawmakers and regulators want to ensure that a sponsor has skin in the game and scrutinizes underlying assets instead of passing along all the risk.

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