As things stand under Basel II, securitised debt, including instruments such as asset-backed bonds, will incur far higher risk weightings than corporate bonds carrying the same credit ratings. For example, under the standardised approach of Basel II, BB-rated corporate bonds carry a 100% risk weighting. By contrast, BB-rated securitised assets carry a risk weighting of 350%.
Hermann Watzinger, ESF chairman and head of global financial markets for Germany at ABN Amro, said this could damage the market for sub-investment grade debt at a critical time. “We need a liquid, functioning credit market because this is what has allowed banks to come through the credit cycle relatively unscathed,” Watzinger added.
The ESF, which is affiliated to the Bond Market Association, says it has data going back 15 years that proves asset-backed securities should actually carry lower risk weightings than corresponding corporate bonds. The Basel Committee’s working paper is open for comment from market practitioners until December 20.