Not only are U.S. bank regulators going down the same new road as the Basel Committee on developing a ratings-driven approach to risk weightings, they also may be moving faster.
U.S. 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, according to sources familiar with the proposal.
In proposing a rating-driven approach, U.S. regulators will depart from their pending November 1997 proposal and recommend a graduated system that is widely expected to be similar to the Basel proposal made last month.
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 sooner than the Basel plan because of the extended comment period involved in the Basel process.
Karen Shaw Petrou, president of Washington-based consulting firm ISD/Shaw, said that while the Basel proposal is still some two to three years away, U.S. 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 plan, excludes corporate bonds and concentrates on securitizations.
In 1997, U.S. regulators had recommended only one level, consisting of a 20% risk weighting for all triple-A rated securitized tranches. That resulted in banks being forced to pony up 100% risk capital for non-triple-A-rated tranches.
Sources expect the new recourse proposal will, like the Basel proposal, feature greater reserve requirements for the tranches rated at the lower end of the spectrum.
It also is widely expected both the U.S. and Basel plans will 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 top-rated MBS, ABS and CMBS would likely be accorded the same risk weighting as Fannie Mae and Freddie Mac, which opposed a similar ratings-driven approach when it surfaced as part of the November 1997 recourse rule.
Fannie Mae and Freddie Mac refused to comment, however, it is widely believed both companies oppose such a plan.
But several sources agreed that that since the ratings-driven approach is itself driven by U.S. regulators, the issue is likely to remain a live one. - ES