
Basel II securitisation treatment too harsh, says Fitch
“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.RiskNews.net
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Structured products
Podcast: Claudio Albanese on how bad models survive
Darwin’s theory of natural selection could help quants detect flawed models and strategies
Range accruals under spotlight as Taiwan prepares for FRTB
Taiwanese banks review viability of products offering options on long-dated rates
Structured products gain favour among Chinese enterprises
The Chinese government’s flagship national strategy for the advancement of regional connectivity – the Belt and Road Initiative – continues to encourage the outward expansion of Chinese state-owned enterprises (SOEs). Here, Guotai Junan International…
Structured notes – Transforming risk into opportunities
Global markets have experienced a period of extreme volatility in response to acute concerns over the economic impact of the Covid‑19 pandemic. Numerix explores what this means for traders, issuers, risk managers and investors as the structured products…
Structured products – Transforming risk into opportunities
The structured product market is one of the most dynamic and complex of all, offering a multitude of benefits to investors. But increased regulation, intense competition and heightened volatility have become the new normal in financial markets, creating…
Increased adoption and innovation are driving the structured products market
To help better understand the challenges and opportunities a range of firms face when operating in this business, the current trends and future of structured products, and how the digital evolution is impacting the market, Numerix’s Ilja Faerman, senior…
Structured products – The ART of risk transfer
Exploring the risk thrown up by autocallables has created a new family of structured products, offering diversification to investors while allowing their manufacturers room to extend their portfolios, writes Manvir Nijhar, co-head of equities and equity…