Basel to sign drafts on securitization holding requirements - sources

By Rizza Sta. Ana

Nov 29, 2013 08:58 AM EST

Two sources who were familiar with the plans told Bloomberg that the Basel Committee on Banking Supervision is set to sign off draft proposals regarding capital requirements for banks regarding their holdings in securitizations. Securitizations, as the news agency explained, are the riskiest type of bundled debt. Banks had been acquiring securitizations while looking to protect their higher-quality paper from oppressive rules. The Basel committee will be signing the drafts starting December 3 in Hong Kong.

Global regulators believed that the rise in securitizations purchases in the US and European markets prior to 2008 were one of the factors of the Lehman Brothers collapse and the financial crisis that followed it. The issuance of securitizations had then plunged subsequently as lenders struggled in the value of financial instruments that were previously highly-rated and are backed by residential mortgage debt, the report said.

Securitizations include asset-backed paper, for one, and other home loans-based instruments, Bloomberg explained in its report. Asset-backed paper is a financial instrument whose value is derived from a cluster of assets like credit card debt or loans, as oppose to mortgages.

Basel force-requires banks to have a certain minimum amount of capital like retained earnings or shareholder equity as to be hedged against the securitizations.

Ernst & Young LLP head of prudential advisory and former U.K. member of the Basel group Patricia Jackson said, "It is extremely important" that regulators "use the levers that they have to get a robust market going forward. They realize that it's very important to get the securitization market going again."

Washington-based research firm Federal Financial Analytics Inc managing partner Karen Shaw Petrou said in an email, of which she referred to the Basel group's other initiatives, "I expect Basel to continue on the same anti-securitization course evident in the capital and liquidity rules. All of this seeks to stamp out structured securitizations and instruments backed by non-traditional assets."

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