A topsy-turvy world

The full implementation of Basel II in Europe next year has caused some banks to question whether they should retain the equity tranches of securitisation transactions on their balance sheets. Some are already selling equity tranches on to hedge funds, but the subprime sell-off in the US could hamper demand for this paper. Duncan Wood reports

The world of securitisation is about to be turned upside down. When the new Basel II capital adequacy framework comes into full effect in Europe and parts of Asia and the Middle East at the start of 2008, it will no longer make sense for originating banks to sell the higher-rated paper and retain the riskier notes, as is common under the current regime. Instead, risk levels will determine how much capital banks need to hold, meaning there will be a strong incentive to sell the equity portion and