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Looser Bank Buffer Rules No Panacea For Europe, U.S.

A decision by global regulators to give banks more time and flexibility to build cash reserves will not boost lending or speed recovery in debt-strapped Europe, where firms and households have scant appetite to borrow.

Across the Atlantic, housing market news has been more encouraging. U.S. single-family home prices in October rose for the ninth straight month and economists expect housing added to growth last year for the first time since 2005.

Allowing banks to include residential mortgage-backed securities among assets they set aside for emergencies could spur more lending by U.S. banks, and help revive securitisation, or packaging of mortgages and other loans into bonds.

"This should, at the margin, favor U.S. banks relative to European banks, because the use of these assets is much less common in most European countries than it is in the United States," said Tobias Blattner, economist at Daiwa Europe.

But the softer rules may not change much for the largest U.S. banks, Julian Jessop, analyst at Capital Economics, wrote in a note to clients. Jessop noted that many of these banks already met the original stricter requirements.

"Some smaller banks would have struggled to do so by (the original proposed deadline of) 2015, but it was always likely that they would have been given more time," he added.

Demand for privately issued mortgage-backed securities could increase, analysts said, which could hurt those issued or guaranteed by the big U.S. mortgage financing agencies.

"But still, implementation has now been extended six years to 2019, so any potential effect will not be felt for a long time," said Brian Lancaster, the co-head of structured-product strategy and analytics at Royal Bank of Scotland.

First, U.S. regulators must iron out a quirk in the rules that say mortgage bonds must be backed by full-recourse loans. At least a dozen U.S. states, including Texas and California, only allow non-recourse loans, in which lenders cannot come after a borrower if a house sells at auction for less than the amount still owed. This differs from Europe and Australia, and the practice would disqualify those loans.

"For this to work, U.S. regulators will have to deviate from the precise proposals of the Basel committee," said Tom Deutsch, the executive director of the American Securitization Forum.

GOVERNMENT BONDS LOSE OUT?

One notable change could be diminished support for government bonds. Under the original Basel draft, the emphasis was almost exclusively on holding sovereign debt but the changes mean some corporate debt rated as low as BBB-, a range of easy-to-sell shares and double-A rated residential mortgage-backed securities can also be used.

The iTraxx senior financial index, which measures the risk of a default on bank debt, saw spreads narrow on Monday from 125 to 121.5 basis points, a sign that investors see the changes as potentially beneficial for bank debt.

"Credit spreads are a bit tighter," said one credit market trader. "But it (the index) has had a very big performance since the start of the year, so perhaps that has limited the impact we have seen."

There are other restricting factors.

Deductions, known as haircuts, will be taken from the assets' value to ensure they provide adequate protection even if their value drops. Combined, they will be allowed to account for only 15 percent of what a bank must hold.

"From a big picture perspective, these revisions are potentially negative for sovereign debt in so much as they reduce banks' imperative to hold government bonds," said analysts at Rabobank.

Copyright 2012 by Reuters. All rights reserved.

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