Basel experts agree securitisation treatment

Global banking experts have agreed proposals for treating the credit risks for banks of asset securitisation under the complex Basel II capital Accord.

The knotty credit risk problem posed by asset securitisation, where a bank pools loans and other credits to its customers and issues new securities against the pool, was the last major outstanding issue with the Basel II Accord, a set of risk-based rules on bank protective capital aimed at making the world’s banking system safer.

Technical experts with the Capital Task Force, the senior sub-grouping of the Basel Committee on Banking Supervision, agreed the details at a meeting in London that concluded late yesterday, a day ahead of schedule, banking regulators said.

The task force’s proposals will now go for final approval by the Basel Committee at its mid-September meeting in Cape Town in two weeks’ time.

The proposals will be set out in a working paper on asset securitisation that is now likely to be issued on October 1, the date on which more than 300 banks in some 40 countries will also receive the key third Basel II quantitative impact survey, or QIS 3. The Basel Committee also plans to issue a non-technical overview of the Basel II accord on October 1.

The Capital Task Force agreed, among other things, a formula whereby bank regulators can assess the creditworthiness of a loan securitisation where the securitisation has not got a rating from credit rating agencies.

The prudential way of treating an unrated securitisation issue would be for regulators to require banks investing in them to put up protective capital amounting to 100% of the value of the issue to guard against any losses from the default or non-payment of the loans and credits underlying the issue.

But the formula will enable regulators to assign risk weightings to the securitisation so that the amount of protective capital can more accurately match the risks actually faced by the bank. The higher the creditworthiness of the issue, the lower its risk weighting and the less the capital charges required by the regulators.

Meanwhile, the Basel Committee’s risk management sub-group will hold a two-day meeting in Paris on September 11 and 12 to put uncontroversial finishing touches to QIS 3 as it applies to the operational risk aspects of Basel II.

QIS 3 will seek information from the banks on how they will be affected by Basel II, which the regulators want to apply to large, international banks from late 2006.

On October 1, banks will be given the risk-weight functions and formulas they need to apply to the information they are now collecting for draft spreadsheets issued to them by the Basel Committee in July. The committee will want QIS 3 replies by December 20.

Banks will be able to gauge fairly accurately from QIS 3 the final shape of Basel II as envisaged by the Basel supervisors. The committee will also issue on October 1 an overview of progress with the accord.

Regulators hope to issue their third Basel II consultative paper, or CP 3, for industry comment in May next year. They expect to publish the final version of Basel II in late 2003, allowing some three years for banks and their regulators to ready themselves for implementation in late 2006.

David Keefe

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