Basel Said to Target Bundled Debt in Hunt for Capital Holes
By Jim Brunsden
Global regulators are set to toughen capital requirements for banks’ holdings of the riskiest types of bundled debt, known as securitizations, while seeking to shield higher-quality paper from overly onerous rules. The Basel Committee on Banking Supervision will sign off on draft proposals at a meeting in Hong Kong starting Dec. 3, according to two people familiar with the plans who asked not to be named because the process is private. The boom in the U.S. and European markets for securitizations in the years leading up to 2008 was seen by regulators as one of the main reasons for the collapse of Lehman Brothers Holdings Inc. and the ensuing financial crisis, as lenders struggled with a plunge in the value of previously highly rated instruments backed by residential mortgage debt. The issuance of such securities subsequently plunged. Basel requirements force banks to have a minimum amount of capital, such as shareholder equity, or retained earnings, to cover potential losses on their investments, including on securitized debt. Under Basel rules, banks measure the risk of losses on investments, such as securitized debt, using credit ratings, their own internal models and supervisory guidance. High-quality securitizations have a smaller risk of losses. “I expect Basel to continue on the same anti-securitization course evident in the capital and liquidity rules,” Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc., said in an e-mail, referring to several other initiatives by the committee. “All of this seeks to stamp out structured securitizations and instruments backed by non-traditional assets.”