BofA Merrill: New Basel Rules Would Hurt ABS

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Analysts at Bank of America Merrill Lynch have a beef with new rules from the Basel Committee on Banking Supervision (BCBS) that spell out how much regulatory capital needs to be set aside for securitizations.

The regulations are too complex and too conservative, they said in a weekly report on the industry. “Multiple regulatory overrides and hard-wired inputs render the framework much less risk-sensitive than alleged and more cumbersome to understand and implement,” the analysts wrote. “We see large variations in capital outcomes depending on the approach used.”

Documents explaining the new framework under Basel III were released at the end of January. The analysts said that the quantitative impact study was underway and that the BCBS was receiving feedback until late March. This, they added, was not enough time to properly digest rules of such complexity.

The analysts estimate that the proposed framework could require banks to jack up their capital held against asset-backed holdings by €42 billion ($55 billion). In their view regulatory capital throughout the finanical sector would rise several times over as a result of the new rules.

The biggest increases in bank capital would be visited on the U.K., the Netherlands and Spain. That analysts said that for securitizations to produce the current levels of risk-adjusted return on capital, lending margins on securitized loans would have to gap out.

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