Securitisation will not be damaged by Basel II, says Mercer Oliver Wyman

Securitisation and related forms of credit risk transfer are unlikely to suffer in the long-term under the Basel II proposals, according to a report published today by financial and risk management consultancy, Mercer Oliver Wyman.

Speaking at a press briefing, Thomas Garside, managing director and deputy head of the company’s finance and risk practice, and lead author of the study, said the original Basel Accord had provided market participants with a number of regulatory loopholes that had been exploited through techniques such as securitisation. “Basel I had to change. It was being arbitraged to death by institutions,” he said.

A number of leading participants in the securitisation industry have criticised the new Accord, which has sought to block the kind of regulatory arbitrage seen in the past by imposing higher capital charges on certain types of securitisations. They believe the proposed regulatory treatment is too severe and that it could seriously hamper the securitisation business. Garside countered by saying that although securitisation volumes may drop in the short run, increased information available to investors and the greater amount of assets that are freed up to securitise through the new proposals will see greater interest in securitisation for investment purposes in the long term.

His report also pointed out that there is likely to be a continued growth in the credit derivatives market as synthetic securitisation techniques evolve to replace cash securitisations. “More risk transparency implies that Basel II will encourage simpler risk transfer products at the expense of more highly structured transactions,” said the report.

The more favourable terms available to participants using credit derivatives under Basel's internal ratings-based advanced approach will also see an expansion in the number of participants in the credit derivatives market, said the report.