The synthetic risk transfer (SRT) market is likely to avoid the damage that the initial version of Basel IV would have caused according to Global ABS panellists.
Speaking at the prudential regulation round table on Tuesday, David Saunders, executive director in the securitized product group at Santander, said the changes would have made SRT deals “essentially unviable”.
Panellists said that last week it emerged that in response to lobbying from the market, the p factor will now likely be cut in half for such deals until 2032.
That leaves the market “slightly worse off than where it would otherwise have been, but nowhere near as bad as it might have been”, Saunders said.
Speaking before the conference, James Parsons, partner in PAG, had said the issue was a major concern.
“It’s a major issue for the market,” he told GlobalCapital. “I don’t think it would kill the market dead, but it could certainly change the way deals are structured quite a bit and it may kill deals in certain portfolio types.”
He explained that the regulation would have meant capital requirements greater than the original pool for securitizations, rendering many deals pointless.
“Under the output floor, an SRT transaction will need to be evaluated under the sec SA formula, which generally requires a very thick tranching of around 20% to get to minimum risk weight,” he said. “Commonly, deals for IRB banks are done with nought to around 7% detachment tranching. So if you do an IRB deal the capital requirements under sec SA can be significantly bigger than that on the portfolio you started with before you securitized.”
Both Saunders and Parsons thought the issue came from an oversight, since Basel IV was not intended to touch the securitization regulations directly.
“It’s probably a technical oversight in the sense that Basel IV legislation and the securitization regulation were produced by different policy departments,” Parsons explained. “[There has] been extensive lobbying because it could significantly change the landscape in SRT but it’s now a political decision.”
Saunders also warned that “we need to wait until we see the final document”.