New proposals for updating the Basel II framework would impact structured finance globally and the ABCP market in particular, according to Fitch Ratings

The proposals, published last month by the Bank for International Settlements (BIS), seek to update the Basel II framework in response to market events of the past 18 months which have triggered global financial turmoil.

"Originally Basel II was intended to promote a level playing field by providing neither an incentive nor a disincentive for a bank to securitize assets," said Peter Winning, a director in Fitch's European structured finance team. "However, under the latest proposals for re-securitization exposures there would be a clear disincentive for banks to provide liquidity facilities to ABCP conduits."

The proposals would make several changes to how banks calculate their minimum capital requirements. The final proposal made by the Basel committee concerns the requirement for banks to conduct their own risk analysis. Banks will no longer be able to rely solely on external credit ratings and must instead also perform their own risk assessment.

Failure to do so could mean a securitization exposure being treated as unrated which would result in a full capital deduction. This could impact the entire securitization market. However, in the rating agency's view, the impact on the ABCP market would be minimal because most liquidity facilities are not externally rated.

Consequently, most banks are aiming to use the internal assessment approach (IAA) under the IRB to size the capital charge on any conduit liquidity facilities they provide. The BIS proposals are currently under consultation until April 17, 2009.

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