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Proposals by the Basel Committee on Banking Supervision would be so onerous for some securitisations that banks would shun investments in the debt, according to consultation responses published on the group’s website.
"Left unchanged, the proposed rules would substantially reduce the incentives for banks to participate in securitisations" and could hamper "the availability of affordable credit to the wider economy", Deutsche Bank said in its public response to the Basel group. The rules risk being "very punitive", Europe’s biggest investment bank by revenue said.
Limiting Bank Leverage
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. While the Basel group has focused on ensuring banks have enough capital to cover risks from their holdings, other authorities have focused on ways to revive high-quality securitisations. The Basel committee’s proposals published in December would constrain banks’ ability to minimise the capital they must hold to absorb losses on asset-backed debt. The group has said that the rules would be “more stringent than under the existing framework.”
Economic Turmoil
Central banks and lawmakers identified the pre-crisis boom in securitisations 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. The Basel committee approach 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 to the Basel plans.
Underlying Loans
"As long as regulators penalise securitisations just because they are securitisations and not because the resulting instrument is indeed riskier than underlying loans, credit markets like small business and infrastructure in the EU and mortgages in the US that need secondary markets will struggle", Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc., said in an e-mail.
The Basel committee in its December proposals ruled out having a system where capital requirements for asset-backed debt simply mirror those that would apply to the underlying assets. "Securitisations have a wide range of structural features that do not exist for banks holding the underlying pool outright and that are impossible to capture in models", the committee said.