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By Liam Vaughan
Banks are lobbying against international plans to tighten rules on securitization claiming they will tie up capital and starve the economy of credit.
Credit Suisse Group AG (CSGN), BNP Paribas SA (BNP) and Deutsche Bank AG are among lenders that have written to the Basel Committee on Banking Supervision in Switzerland to voice concern about reforms to be implemented from 2014. In a securitization, banks re-package assets, usually loans, and sell them in slices to outside investors.
Regulators are overhauling the rules after the widespread use of the technique in the U.S. mortgage market contributed to the financial crisis by spreading risk from lenders to the so- called shadow banking sector. The firms say the plans, which will force banks to hold more capital against any tranche they keep, would make transactions prohibitively expensive.
“The imposition of rules that serve to materially increase the capital requirements of securitizations could have the unintended consequence of creating disincentives for banks to be active in the securitization markets,” Rudolf Bless, Credit Suisse’s deputy chief financial officer, and Brian Chin, head of securitized products, wrote in a letter to the Basel group published this month. That could undermine “credit supply and overall liquidity of the global economy,” they wrote.
The committee at the Bank for International Settlements in Basel will carry out an impact study of the securitization proposals in the coming weeks, Bill Coen, the group’s deputy secretary general, said in an telephone interview. The plans are likely to be on the agenda for the June meeting, he said.
Spokesmen for Paris-based BNP Paribas, Deutsche Bank in Frankfurt and Zurich-based Credit Suisse declined to comment.
In traditional or so-called cash securitizations, assets leave the bank’s balance sheet, freeing up capital and allowing the lender to extend more loans. In so-called synthetic deals, banks retain the assets and buy protection against some of the potential losses from investors, often in the form of credit- default swaps. That allows the lender to reduce the capital regulators require it to set aside against the assets.
In 2011, Barclays bought protection on the first 300 million euros of losses on 6 billion euros of loans to an undisclosed counter-party. Standard Chartered Plc (STAN) the same year sold the credit risk on $3 billion of trade-finance loans to Asian companies. Citigroup last year bought insurance on a $1.2 billion of shipping loans from Blackstone Group (BX) Plc allowing the New York-based bank to reduce how much it sets aside to cover defaults by as much as 96 percent.
More than 40 lenders, trade bodies and financial firms have responded to the Basel Committee’s request for feedback on its plan to overhaul the market published Dec. 18. Proposals include forcing banks to hold more capital against the retained portion of a pool of assets which has been securitized, cutting the role of credit-ratings companies, and making the capital requirements more sensitive to the riskiness and maturity of assets.
If left unchanged, the proposal will “substantially reduce the incentives for banks to participate in securitizations as investors,” Andrew Procter, global head of compliance at Deutsche Bank, wrote. It may also “have a severe impact on the securitization market and the availability of affordable credit to the wider economy,” he wrote.
The Basel Committee’s approach is based on the false assumption that all securitizations performed badly during the crisis, when most losses were confined to subprime mortgages, BNP Paribas said in its submission.
That failure to differentiate between asset classes would have the effect of disproportionately hitting higher-quality assets, Credit Suisse, BNP Paribas and Deutsche Bank wrote. If prevented from securitizing assets, lenders would be forced to continue to rely on central bank loans for funding, and deprive companies and customers from access to loans, BNP Paribas said.
To contact the reporters on this story: Liam Vaughan in London at lvaughan6@bloomberg.net
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Banks are lobbying against international plans to tighten rules on securitization claiming they will tie up capital and starve the economy of credit.
Credit Suisse Group AG (CSGN), BNP Paribas SA (BNP) and Deutsche Bank AG are among lenders that have written to the Basel Committee on Banking Supervision in Switzerland to voice concern about reforms to be implemented from 2014. In a securitization, banks re-package assets, usually loans, and sell them in slices to outside investors.
Regulators are overhauling the rules after the widespread use of the technique in the U.S. mortgage market contributed to the financial crisis by spreading risk from lenders to the so- called shadow banking sector. The firms say the plans, which will force banks to hold more capital against any tranche they keep, would make transactions prohibitively expensive.
“The imposition of rules that serve to materially increase the capital requirements of securitizations could have the unintended consequence of creating disincentives for banks to be active in the securitization markets,” Rudolf Bless, Credit Suisse’s deputy chief financial officer, and Brian Chin, head of securitized products, wrote in a letter to the Basel group published this month. That could undermine “credit supply and overall liquidity of the global economy,” they wrote.
June Meeting
In recent months, banks have begun to look again at securitizations as a way of meeting the higher capital targets - - without cutting lending or raising fresh equity.The committee at the Bank for International Settlements in Basel will carry out an impact study of the securitization proposals in the coming weeks, Bill Coen, the group’s deputy secretary general, said in an telephone interview. The plans are likely to be on the agenda for the June meeting, he said.
Spokesmen for Paris-based BNP Paribas, Deutsche Bank in Frankfurt and Zurich-based Credit Suisse declined to comment.
In traditional or so-called cash securitizations, assets leave the bank’s balance sheet, freeing up capital and allowing the lender to extend more loans. In so-called synthetic deals, banks retain the assets and buy protection against some of the potential losses from investors, often in the form of credit- default swaps. That allows the lender to reduce the capital regulators require it to set aside against the assets.
Buying Protection
Standard Chartered Plc, Barclays Plc (BARC) and Citigroup Inc. (C) have all carried out synthetic deals since the financial crisis.In 2011, Barclays bought protection on the first 300 million euros of losses on 6 billion euros of loans to an undisclosed counter-party. Standard Chartered Plc (STAN) the same year sold the credit risk on $3 billion of trade-finance loans to Asian companies. Citigroup last year bought insurance on a $1.2 billion of shipping loans from Blackstone Group (BX) Plc allowing the New York-based bank to reduce how much it sets aside to cover defaults by as much as 96 percent.
More than 40 lenders, trade bodies and financial firms have responded to the Basel Committee’s request for feedback on its plan to overhaul the market published Dec. 18. Proposals include forcing banks to hold more capital against the retained portion of a pool of assets which has been securitized, cutting the role of credit-ratings companies, and making the capital requirements more sensitive to the riskiness and maturity of assets.
‘Severe Impact’
Banks argue the rules as drafted are too aggressive and will undermine the economic incentive for banks to engage in securitization.If left unchanged, the proposal will “substantially reduce the incentives for banks to participate in securitizations as investors,” Andrew Procter, global head of compliance at Deutsche Bank, wrote. It may also “have a severe impact on the securitization market and the availability of affordable credit to the wider economy,” he wrote.
The Basel Committee’s approach is based on the false assumption that all securitizations performed badly during the crisis, when most losses were confined to subprime mortgages, BNP Paribas said in its submission.
That failure to differentiate between asset classes would have the effect of disproportionately hitting higher-quality assets, Credit Suisse, BNP Paribas and Deutsche Bank wrote. If prevented from securitizing assets, lenders would be forced to continue to rely on central bank loans for funding, and deprive companies and customers from access to loans, BNP Paribas said.
To contact the reporters on this story: Liam Vaughan in London at lvaughan6@bloomberg.net
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