In the Marketplace

The report, Basel II: The 'Bottom-line' Impact on Securitization Markets, evaluates the amount of Basel II capital that banks must hold on an unsecuritized pool of assets in comparison to holding a securitized structure of these same assets. It details how the new capital framework might affect investment flows within structured product markets. Fitch finds that banks could potentially face lower capital charges by investing in rated securitization structures rather than by directly holding a comparable pool of unsecuritized assets, particularly for credit card asset-backed securities (“ABS”), commercial mortgage-backed securities (“CMBS”), and residential mortgage-backed securities (“RMBS”). Fitch also notes that Basel II could influence how banks structure their securitization deals as they “will face strong pressures under Basel II to minimize their exposure to sub-investment grade tranches, given the significant amount of regulatory capital they will have to hold against these positions,” according to Krishnan Ramadurai, Senior Director, Financial Institutions, Fitch Ratings.

The ultimate effect of Basel II on the securitization markets will depend in large part on how banks identify and respond to these new regulatory capital incentives. According to Kim Olson, Managing Director, Algorithmics, “the impact of Basel II on a bank's decision to securitize a portfolio of assets will depend on a complicated interplay of factors, including, for example, the inherent default risk and recovery rates of the underlying assets, the type of asset or product being securitized, the tranching of the resulting securitization structure, and the features or conventions of the structuring process, such as excess spread and reserve funds.”