Basel’s CDO solution

As the Basel Committee on Banking Supervision continues its stately progress towards a revised capital Accord, one area remains under debate: the proposed capital rules for asset securitisations. As some readers will recall, it was securitisations that prompted central bankers to consider revising the old 1988 accord in the first place. By the late 1990s, it was apparent that large banks were habitually using regulatory capital arbitrage to shrink credit risk capital requirements. Basel’s solution would be to align regulatory capital much more closely with economic risk capital.

Today, securitisation continues to grow apace, encouraged by the extra oxygen of derivatives-based synthetic securitisation technology. Product complexity is also increasing rapidly. And so it was perhaps inevitable that the Basel II endgame would reduce to the issue of capital treatment for securitisations.

Last October, the Committee issued a working paper proposing a new supervisory formula approach to securitisation. In the first of this month’s Cutting Edge papers (view article), Michael