The argument runs thus: residential mortgage portfolios attract lower risk weightings under Basel II whereas securitisations of all types will be penalised with a high capital charge. Ergo: ‘on-balance securitisation’ (covered bonds) is the answer to bankers’ desire to use capital efficiently.
Only up to a point, though. This year’s outlook for covered bonds is healthy, with new markets opening up in Belgium, Italy and Norway. But securitisation will continue to remain attractive, says William Ross, global head of asset securitisation at ABN Amro, depending on “where you are standing and at what you are looking” (see How secure is the future? on page 14 of this month’s Capital Strategies for Banks supplement).
Two critical factors are the type of risk management approach used (Basel II offers standardised, foundation and advanced – the latter two being internal approaches) and the structure of the securitisation. The internal approaches favour keeping granular consumer exposure on balance sheet as the capital weighting falls away dramatically. But unrated corporate exposures are treated more harshly. In a conventional securitisation, under the internal approaches the tough treatment of retained equity makes them unattractive – although less sophisticated banks using the standardised approach might still find them worthwhile.
Another ruse is that by replacing retained equity with excess yield (the difference between the portfolio yield and financing cost) as a way of keeping first loss, the capital released by securitisation is much more substantial, again making it attractive. Another option is to distribute the equity to other parties to satisfy IAS requirements on securitisation.
Mr Ross says: “We expect the emphasis in regulatory capital securitisations to increasingly shift towards corporate assets.” And this has an impact on another market: collateralised debt obligations (CDOs). While these were mostly made up of high-grade assets, due to their capital inefficiency, they may now stay on balance sheet with unrated corporates going into the CDOs.
Confused? Capital Strategies for Banks explains it all. Brian Caplen
