Basel II securitisation issues conclusion expected this week

Experts expect this week to finalise their proposals for handling the one major issue still outstanding in the complex Basel II Accord aimed at making the world’s banking system safer – the technically thorny question of how to treat the credit risks for banks of asset securitisations.

Regulators with the Basel Committee on Banking Supervision, the architect of Basel II and the body that regulates international banking, are confident of agreeing a solution due for publication in early October. This is likely to fall shortly after October 1, when a key Basel II survey – the third quantitative impact study or QIS 3 – will be issued to over 300 banks in some 40 countries.

Asset securitisation takes place when banks pool assets in the form of their loans and other credits to customers and issue, typically via a so-called special purpose vehicle, new securities backed by the pool. Securitisations raise complex problems for regulators, including the question of how credit risks are transferred between banks issuing the new securities and banks investing in them.

The banking industry wants to ensure the development of asset securitisation is not stifled by regulation. The Basel supervisors want to ensure that major banks are adequately protected by capital charges against any losses from the default or non-payment of the loans and credits underlying a securitisation.

Technical experts with the Capital Task Force, the most senior sub-grouping of the Basel Committee, are meeting in London on September 4 and 5 to sign off on proposals for treating securitisations that the committee is then expected to approve at its mid-September meeting in Cape Town, South Africa.

Regulators said a prominent feature of the risk-based Basel II treatment of asset securitisation would be a formula that regulators themselves could use to rate the risks of those securitisation issues whose credit-worthiness has not been assessed by the leading credit-rating agencies. Regulators were reluctant to give details of this or other aspects of the securitisation question ahead of this week’s meeting.

The Capital Task Force will also agree the final touches to QIS 3, which will seek information on how the risk-based Basel II Accord will affect banks in terms of their protective capital. The Accord in the first instance will determine how much of their assets the large international banks of the leading economies will have to set aside to absorb any unexpected losses from the hazards of banking, including market and operational risks as well as credit risk.

The Basel Committee agreed most of the outstanding Basel II issues in July, after several months of uncertainty during which some bankers and regulators doubted the much-delayed Accord would ever come into force. Germany, which had threatened to veto Basel II, dropped its objections after the committee agreed a compromise on the treatment of the risks of lending to the politically important small and medium-sized company sector.

On October 1, banks will be given the risk-weight functions and formulas they need to apply to the information they are now collecting for draft spreadsheets issued to them by the Basel Committee in July. The committee will want QIS 3 replies by December 20.

Banks will be able to gauge fairly accurately from QIS 3 the final shape of Basel II as envisaged by the Basel supervisors. The committee will also issue on October 1 an overview of progress with the Accord.

Regulators hope to issue their third Basel II consultative paper, or CP3, for industry comment in May next year. They expect to publish the final version of Basel II in late 2003, allowing some three years for banks and their regulators to ready themselves for implementation in late 2006.

The Basel II principles are designed to apply to banks of all sizes throughout the world. Basel I, the current and simpler capital adequacy accord that dates from 1988, has been adopted in over 100 countries. The European Commission intends applying rules closely modelled on Basel II to all banks and investment firms in the 15-nation European Union.