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Securitization bankers baulk at Basle II

Recent proposals from the Basle Committee on Banking Supervision have dismayed securitization bankers. They believe regulators are taking an unjustifiably punitive approach to the industry.

The latest plans of international regulators for capital adequacy requirements threaten to cripple the securitization industry, bankers reckon. Proposals from the Basle Committee on Banking Supervision would force banks investing in asset-backed securities to hold a much larger amount of capital in reserve than for corporate bonds of the same credit rating.

"The securitization group seems to have set off on its own path, which does not align with the Basle II process at all," says a UK banker.

"The extra capital requirement, which is not justified, will harm securitization unless it is changed," says Mark Nicolaides, a securitization partner at Mayer, Brown, Rowe&Maw. "The regulators are going to impair the ability of people to do deals, and they're going to increase the costs of doing deals."

The rationale of the Basle proposals is to make sure banks put enough aside to cover investment losses. The proposals set a standard rate of 8% as the typical amount a bank should hold against an investment. Then, a multiple known as a risk weighting is applied depending on how risky the product is.

A double-B corporate bond is risk weighted at 150%. So a bank buying such a bond must set aside one-and-a-half times the 8% base rate of capital - $12 million - in reserve for every $100 million it buys.

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