In Washington this week talks continued concerning both the Bankruptcy Reform Act and the risk-based guidelines for buying asset-backed securities.
"It does appear that the bankruptcy reform legislation that's been stuck down in the halls forever, finally might get approved [this week]," a source said. "In November there was talk about getting it done, however."
The theory driving the bill is that the current bankruptcy laws are too relaxed. The reform would make it more difficult for defaulters to walk away from debt.
Under the proposed reform, a debtor would be forced to prove he or she cannot pay off the debt. Additionally, the reform would force the debtor to file a Chapter 13, which requires some attempt and effort to repay debts over time.
On the risk-based guidelines, banks investing in asset-backed securities would be required to hold 20% as opposed to 100% capital against the investment.
"In other words if I'm an investor, and I'm a bank and I buy asset-backed securities, instead of holding 100% of a capital requirement against that particular security I bought, as a fixed income investment, it's going to be 20%."
The result is that, if these guidelines are put through, it's going to be much more economic for banks to invest in asset-backed securities.