The third consultative paper on the new Capital Adequacy Framework Accord was released to market participants at the end of April, and the Basel Committee has set a July 31 deadline for comments before making the final modifications expected by the end of this year. Market sources warn that this will be the last chance that industry players have to voice concerns regarding how the regulation will affect securitizations going forward.

"People need to speak even louder because this is very real and the deadline is looming right on schedule," said one source. "There are still a number of issues that can have serious implications for certain areas of this industry."

The proposal has changed somewhat since it was first submitted for market commentary in October 2001. According to market sources, the committee now acknowledges that the nature of securitization relates to the transfer of ownership and/or risk associated with credit exposures of a bank or other parties. The committee also recognizes the importance of securitization in respect to providing better risk diversification and enhancement of financial stability.

There is still the issue of capital risk weighting, however, which seemingly penalizes lower-rated and unrated assets. Under the standardized approach, explained analysts at Dresdner Kleinwort Wasserstein, these assets would be required to hold more capital than a corporate exposure.

"In the committee's view, such first- and second-loss positions are designed to absorb all losses on the underlying pool up to a certain level, and as such they face greater loss severity," explained analysts at the bank. "Therefore it effectively questions the comparability of ratings of portfolio deals vis-a-vis ratings of corporates, and thus the ratings agencies' ABS, MBS and CDO methodologies."

Market players fear that this will prompt banks to tighten credit and restrict lending in a downturn in order to set aside the required capital dictated under the new accord. The new documentation will be implemented in 2006.

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