Delayed Basel II securitisation paper expected shortly

Global banking regulators hope to issue very shortly the delayed discussion paper on asset securitisation in the context of the complex Basel II capital accord that is aimed at making the world’s banking system safer.

The paper, which deals with the last major outstanding issue in the risk-based Basel II pact, could even be issued tomorrow or Monday, regulatory sources said.

The Basel Committee on Banking Supervision, the architect of Basel II and the body that effectively regulates international banking, will give details in the paper of its proposals for treating the credit risks for banks of asset securitisation. Asset securitisation occurs when a bank puts its loans and other credits into a pool and then issues fresh securities backed by the pool.

The problem of how banks should calculate the protective capital they need to act as a cushion to absorb losses from defaults on loans making up securitisations, has proved one of the most technically difficult of all the Basel II issues.

Regulators had hoped to issue the asset securitisation paper along with the QIS 3 – the third Basel II quantitative impact survey – on October 1, but the pressure of work created by QIS 3 forced a delay.

But, QIS 3, which seeks information from 265 banks in some 50 countries on how Basel II will affect them, contains the risk-weightings needed to calculate capital charges against asset securitisations. The discussion paper will flesh out the thinking behind the weightings as well as other issues.

The Basel Committee wants to implement Basel II from late 2006. Basel II will determine how much of their assets major banks will have to set aside as protective capital to guard against the hazards of banking, including credit, market and operational risks.