Basel Committee proposes changes to the Basel II securitisation framework – what does this mean for new issuance?

A new consultation paper  published earlier this week by the Basel Committee on Banking Supervision will inevitably cause uncertainty and is likely to affect investment decisions long before the new rules take effect.

The paper sets out the Committee’s proposal to revise the treatment of securitisation exposures and is largely inspired by the belief that highly-rated securitisations currently attract too little regulatory capital and low-rated senior securitisations are subject to regulatory capital charges which are too high. The proposals are relatively high level. The Committee has invited the submission of comments by 15 March  2013. Responses to the public consultation, together with the results of a quantitative impact study, will be considered as the Committee moves forward to suggest detailed amendments to the securitisation framework.

The consultation paper includes some eye-catching suggestions, such as the extension of the minimum 20% risk weight currently applied under the standardised approach to the (generally more sophisticated) banks which apply the internal ratings based approach and new sensitivity to the remaining term and thickness of tranches.  This is a fundamental review with all of the secondary rule making, adjustment and uncertainty which that implies.

The Committee is also considering whether certain early amortisation provisions should prevent an originator benefiting from significant risk transfer as, in their view, such provisions often result in regulatory arbitrage.

The development of these changes is occurring in the broader context of changes to prudential regulation such as Basel III and the implementation of Basel III and wider changes through CRD IV in Europe.

It is difficult to predict the long term consequences that these changes will have on the ABS market.  In the short term, institutions will take time to adjust and other investment and funding options may seem relatively more attractive. To the extent that the changes reduce the capacity of banks to originate and invest in securitised products, they may provide further impetus for non-securitised capital markets products and the non-bank  lending sector.  Could this provide more opportunities for the “shadow banks” which policy makers find so dangerous and yet so hard to define?