Basel II asset securitisation paper issued

Global banking regulators yesterday issued their delayed working paper on the treatment of asset securitisations under the complex, risk-based Basel II bank capital accord.

The paper sets out new proposals for determining how much protective capital major banks need to set aside as a cushion to absorb unexpected losses from the credit risks involved with asset securitisations. Asset securitisations occur when banks put their existing loans and credits into a pool and then issue fresh securities against the pool.

The treatment of this hurdle was the last major outstanding issue with the Basel II accord, which regulators want to bring into force for large international banks by the end of 2006.

The Basel Committee on Banking Supervision, the architect of Basel II and the body that effectively regulates international banking, said the paper discusses improvements made to the internal-ratings based treatment as well as those concerning liquidity facilities and structures containing early amortisation features.

The committee said a robust treatment of securitisations is seen as an essential component of Basel II given the large and rapidly growing securitisation markets.

The committee believes that without such treatment the new accord would not achieve the objective of making the world’s banking systems safer by determining how much protective capital banks need to guard against banking risks, including market and operational risks as well as credit risk.

The Basel regulators want any banking industry reaction to the working paper to be with them or national regulators by December 20.