Is securitization that insecure?
Source: www.breakingviews.com is Europe's leading financial commentary service.
Securitization has been one of the big growth areas of the capital markets. So it is no surprise that investment banks and a ratings agency are concerned about the proposed new Basle II rules on bank capital. These, they fear, could act as a major drag on market development.
The new Basle accord threatens their earnings from securitization, a technique whereby loans are converted into tradable securities. It does this by both reducing the incentive for banks to securitize their loans, and making the process itself more capital-intensive.
The proposals themselves are fiendishly complicated. But the complaints focus on two areas. One is that the new accord reduces the capital charge banks have to take against certain classes of loans, such as mortgages, personal loans and smaller company loans, that tend to be heavily securitized under the existing regime. This concession, it is argued, makes it less likely that banks will securitize the same volume of these assets in future as they do now.
The second beef is that the new accord actually penalizes securitization. Take as an example the case of a bank securitizing a pool of five loans with a total value of $100, against which it is obliged to reserve in aggregate capital of $10.