This week's Basel II committee meeting in Tokyo may yield some pleasant surprises for the securitization market, say officials close to the discussions. In particular, industry officials are cautiously optimistic the committee will back down on the supervisory formula approach to assessing risk weighting for asset-backeds, as well as offer some relief on liquidity facility rules for asset-backed commercial paper conduits. The Basel committee is comprised of central bankers and regulators from around the world.
Although this meeting is unlikely to be the last, it will be the one to determine the agenda running up to the year-end deadline for the final draft of the Basel II guidelines. And, based on feedback from the committee, securitization officials are hopeful some easing of the tough securitization guidelines will make it onto the docket.
So far, drafts of the Basel II guideline have been, in the eyes of the market, very harsh on securitization. Industry participants have been pessimistic on how the final treatment will look, but there is now a chance changes could be made, say officials in contact with the Basel committee.
"Some things should be adjusted, but so far (the committee) has been keeping its powder dry, so it's too early to say it's going to cave," notes one London-based securitization expert. He expects this week's meeting to be a lively debate reflecting industry concerns.
Experts are hopeful the committee will realize the supervisory formula approach to risk weighting is untested and too complicated. The supervisory formula is one of three formulas proposed by Basel II to determine the risk weightings for securitizations. "Banks don't understand it. I'm 50/50 hopeful the committee will junk completely this overly complicated and untested formula," says one banker. Apart from securitizations the committee has permitted banks to use their existing internal models and they could relent and allow banks to continue to use their own models for securitization, he notes.
Another area in which securitization bankers are hoping to get some relief is the liquidity facility rules for ABCP conduits. As the Basel II regulations stand now, banks are required to have 1.6% of total conduit assets set aside as additional capital. Securitization experts say that is too high considering these structures already have credit enhancement built into them. They could not say if an alternative amount had been proposed to the committee.
