In addition to top-rated private-label mortgage-backed securities and home-equity loan securities, a new proposal from the Basel Committee for Banking Supervision would likely benefit monoline wraps, according several market players.

Monoline insurers, among others, stand to benefit under the new regulatory regimen based on a ratings-driven approach for risk-weightings of all securitizations held by banks, said Peter Hoey, a managing director at Financial Security Assurance.

However, Hoey noted that for senior-subordinate deals, the ratings-driven approach in the Basel proposal constitutes a mixed blessing at best.

Under the ratings-driven approach, the higher rated classes would clearly benefit, "but the subordinate pieces will be less attractive in the marketplace," he said, because the proposal requires increased capital against tranches at the lower end of the ratings spectrum just as it requires fewer reserves to be held against higher-rated classes.

Using a hypothetical scenario, Hoey outlined the role a monoline insurance wrap might play under a ratings-driven approach. Without any monoline policy, for example, a pool of conforming mortgages might be structured with 10% subordination and thereby garner a triple-A rating for the remaining 90% senior class.

But the size of this 10% subordinate piece could be as small as 5% using a financial guarantee, requiring less bank capital under the Basel proposal. - Ed Staples

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