Basel II securitisation treatment too harsh, says Fitch

Fitch conducted a study, Basel II securitisation proposals: primer and observations, which concluded that while it supported higher capital charges to ‘BBB’ and lower-rated structured tranches of securitisations compared with similarly rated corporate bonds, it believed overall risk weightings should be “calibrated downwards”.

“When the capital charges on individual tranches are added up under the Basel internal ratings-based (IRB) securitisation proposals, they result in substantially more capital being required – in the absence of a cap which is permissible only in certain instances – than the amount of regulatory capital that would have been required had the portfolio not have been securitised,” said Fitch. The agency added that the driver of this “premium” was the level of capital assigned to the most subordinate of tranches. It believes the “overly punitive” weights are likely to result in “the misallocation of capital relative to underling risk across individual securitisation tranches”, as well as “unintended behavioural effects”.

For example, the agency said under Basel’s current proposals, the revised standardised approach levies a higher capital requirement on most investment-grade tranches and lower capital requirements on certain non-investment grade tranches than using the IRB approach. “This difference may lead to a new round of gaming techniques,” said Fitch. This means standardised banks would be incentivised to sell high-quality tranches to IRB banks and purchase lower-quality ones from IRB banks. “The end result would be a double-sided erosion of asset quality of revised standardised banks,” the agency added.

The treatment of securitisations is one of the main outstanding contentious issues left to be resolved in the Basel II Accord. Basel II is due for implementation by the end of 2006.

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