The debate over appropriate risk weighting for ABCP liquidity lines may prove next to meaningless, should the cost to qualify for the better treatment outweigh the capital savings.
At the forefront, the U.S. bank regulators are requiring that liquidity facilities seeking favorable capital treatment be subject to a standardized non-defaulted asset test. While non-defaulted asset tests are common in ABCP liquidity facilities, the standard for determining the definition of a defaulted asset is crafted by banks to the specifics of the particular asset being financed. The Fed is mulling over the unified definition of a defaulted asset in a conduit - specifically, how long past due before the asset is written down and no longer fundable by "eligible" liquidity. It has tentatively proposed a single definition that any conduit-owned asset more than 60 days past due is considered defaulted, which differentiates liquidity support from credit enhancement.