Not only are U.S. bank regulators going down the same new road as the Basel Committee on a ratings-driven approach to risk weightings, but the Americans may be going faster.
United States bank regulators are currently preparing a new proposed recourse rule that, similar to the June proposal from the Basel Committee, will feature a ratings-driven approach to mortgage- and asset-backed securities and commercial MBS, according to sources close to the process as well as Wall Streeters.
American regulators, who started the ball rolling on the ratings-driven approach, will depart from their pending November 1997 proposal and recommend a graduated system that is widely expected to be similar to the June Basel proposal. The U.S. proposal could surface as soon as September, but is more likely later this year. Some sources think the U.S. proposal could become final earlier than the Basel proposal because of the extended comment period involved in the Basel process.
Karen Shaw Petrou, president of Washington-based consulting firm of ISD/Shaw, said that while the Basel proposal is still some two to three years away, American bank regulators already have similar pending rule-making initiatives that could come to fruition before Basel.
One such example is the ongoing proposal on recourse made in November 1997. The U.S. recourse proposal, unlike the Basel's, excludes corporate bonds and concentrates on securitization.
In 1997, the U.S. regulators had recommended only one level, consisting of a 20% risk weighting for all triple-A rated securitized tranches. That plan resulted in banks having to pony up a 100% risk-weighting for non-triple-A tranches.
A source close to the process said this cliff effect will be eliminated in the more graduated system now being developed.
Sources expect the new U.S. recourse proposal will, like the Basel plan, feature greater reserve requirements for the tranches rated at the lower end of the spectrum.
The Basel proposal entails some quite decided consequences and so will the new recourse proposal. It is widely expected the new rules raise the yields needed for agency mortgage-backed securities and lower yields needed for top-rated private-label MBS, CMBS and ABS.
Sources agree that it appears likely under both the Basel proposal and the U.S. regulatory proposal that top-rated MBS, ABS and CMBS will likely be accorded the same risk weighting as Fannie Mae and Freddie Mac. The two government-sponsored enterprises opposed a similar ratings-driven approach when it surfaced as part of the November 1997 recourse rule.
Officials at both Fannie Mae and Freddie Mac refused to comment. However, it is widely known that the agencies oppose the ratings-driven approach. - ES