There are questions about how the government-sponsored enterprises’ risk sharing bonds may be treated under Basel III international accounting standards that could affect bank investors’ appetite for them, according to Fitch Ratings.

Based on Freddie Mac’s recent inaugural issue of structured agency credit risk bonds, Fitch notes, “While the STACR bonds were issued as unsecured obligations of Freddie Mac, their principal repayment is based on the performance of a reference pool of mortgages guaranteed by Freddie Mac.

“Investors in the new securities, which effectively serve as a form of credit enhancement for Freddie Mac, are assuming credit risk of the underlying mortgages, unlike investors in agency mortgage-backed securities. As a result, Fitch does not believe that the current 20% risk weighting applied to agency MBS under Basel III will ultimately be justified” for GSE risk sharing bonds such as Freddie’s or other ones Fannie Mae plans to issue later this year.

“Once the regulatory capital standards for the new securities are defined, it will be easier for banks to determine how much capital they are willing to allocate to this market segment. If the ultimate risk weights are set high, banks are unlikely to become sizeable buyers of the securities,” Fitch said in a report Monday.

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