Home>News on Securitisation>The Hue and Cry Over Basel Rules

11 April 2014

Several Banks across the world have expressed concern over the Basel Committee’s decision to overhaul the global capital rules for asset-backed securities. The Banks fear that this may have a choking effect on securitisations and consequently discourage investors from investing in debt securities. This may also add to the lack of credit for the larger economy.

After the 2008 crash, the general consensus was that banks needed a bigger cushion. In 2010, international regulators met in Basel, Switzerland, and increased capital ratios to more than double. What followed was epic wrangling over what goes into the cushion— how to count equity and how to count assets. The Basel regulators introduced a broader, simpler accounting of a bank’s liabilities, called a leverage ratio. The U.S. regulators have however come up with a leverage ratio that is tougher than Basel’s: it requires the biggest banks to hang on to 5 cents of equity for every 95 cents they borrow. A bipartisan group of U.S. senators think this is too low; they have proposed a leverage ratio of 15 percent.

Meanwhile, big banks have raised about half of what they need to meet the Basel requirements, mostly by holding on to more of their profits; in March 2014 the Federal Reserve said that 25 of 30 big banks passed its latest stress test and were given permission to pay out dividends or buy back stock. 

The Basel Committee’s proposals published in December 2013 may have the effect of constraining banks’ ability to minimize the capital they must hold to absorb losses on asset-backed debt. It seems that the Committee, which has been grappling on the all-important question of how to regulate securitisations since 2008, has taken the view that securitization is inherently bad and is keen to regulate it in a manner that dis-incentivizes market participants. As a result, regulators are punishing the entire market. This apathy towards the concept of securitisation is partly due to the Committee’s lack of understanding of the fact that not all asset classes led to the 2008 financial crisis. There were assets that performed well even in the immediate post-crisis times.

Meeting the new rules means holding on to more money, and that could lead them to do less lending, to the detriment of economic growth. The banks especially dislike the leverage standards, because they ignore the banks’ internal models for determining which investments are riskier. The Basel rules have however gone through a series of revisions to meet these concerns. To avoid hurting the fragile global recovery, for instance, regulators have given banks transition periods that stretch all the way to 2020. Some critics are concerned there may be another global crisis before all the new standards kick in and banks will be caught once again without enough money in the vault. Others think that the only true long-term protection is a set of capital requirements far tougher than those proposed by regulators in Basel or the U.S.

Reported By

Shambo Dey

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