Regulators start wider overhaul of securitization rules

LONDON Tue Dec 18, 2012 1:20pm EST

LONDON (Reuters) - Global regulators have begun an overhaul of how banks should set aside capital to cover risks from securitized products after some turned toxic and triggered the 2007-09 financial crisis.

The Basel Committee published a consultation on Tuesday which proposed tripling the "risk weighting" for asset-backed products so that banks hold more capital in case they become unsellable again as they did during the U.S. subprime crisis and ensuing credit crunch.

The current minimum risk weight is 7 percent and Basel, a committee of banking supervisors from nearly 30 countries, has proposed a floor of 20 percent.

In the wake of the financial crisis, Basel introduced a quick fix, known as Basel 2.5, that already tripled how much capital banks must hold cover holdings of securitized debt.

Tuesday's paper is a deeper, broader review of capital rules for the securitization market and will be followed by an impact study next year and a further paper based on industry feedback.

A key aim is to ease so-called "cliff effects", when securitized debt is sharply downgraded, forcing banks to find a large chunk of extra regulatory capital to cover the increased risk from the debt.

In the crisis, banks were unable to find this extra capital and it led to fire-sales to deepen market woes. A higher floor will help to smooth out such cliff effects, regulators believe.

The securitization market is in the doldrums following the crisis but policymakers see it as a key tool to help banks fund themselves in future and wean themselves off central bank liquidity.

"The committee is well aware of the trade-off between the risk posed by securitization and its function as an important tool for bank funding and liquidity," the committee said in a statement.

"For that reason, it is fully engaged in reviewing the securitization framework to establish prudent and risk-sensitive capital adequacy rules."

(Reporting by Huw Jones; Editing by Louise Heavens)