Amherst: New Basel rules a positive for RMBS market
The three Basel-inspired capital rules recently proposed by bank regulatory organizations are “potentially important and very positive for the RMBS market,” analysts at Amherst Securities Group said in a new report.
“The proposals are more rational than either the ratings-based approach originally scheduled to go into effect in 2013, or the market capital risk rules initially proposed in December 2011, and are an unambiguous positive for the market,” analysts said.
The first capital rule, which applies to all banking organizations, proposes a new common equity Tier 1 ratio and higher Tier 1 capital ratio. The second rule, applicable to the same group, standardizes regulatory rules for calculating risk-weighted assets.
And the third, which applies only to banking organizations subject to the advanced approaches rule, adjusts the advanced approaches rule to better address counterparty credit risk and interconnectedness around financial institutions.
Analysts at Amherst gave three reasons the rules are positive for the RMBS market.
They eliminate the market’s fear of massive bank selling of RMBS securities. Under Basel 2.5, originally scheduled to go into effect in January 2013, capital charges on senior tranches would become solely ratings based, with a dollar-for-dollar capital requirement for securities rated less than BB.
The rules will also allow banks to hold well-enhanced securities with a reasonable capital charge, without worrying about ratings agency actions.
Finally, they move the market away from reliance on the ratings agencies. As banks move away from ratings-based approaches, they will be the second largest group of institutions doing so. The National Association of Insurance Commissioners migrated insurance companies away from the ratings-based approach in late 2009 to an expected loss approach.
“The actions of the bank regulators weakens the role of the rating agencies considerably, and makes it easier for the other major institutional groups that are ratings-dependent (money managers) to justify nonratings-based approaches to determining the risk on RMBS securities,” Amherst analysts said.
“Indeed, the NAIC approach differs quite a bit from the bank approach, but both essentially require an understanding of the structure of the security to interpret the results,” analysts added.
The Federal Reserve earlier this month finalized the market risk capital rules, which require large banks to hold more capital against their trading books.
They do not include elements of the Basel Committee's market risk framework that rely on credit ratings. The exclusion is consistent with the Dodd-Frank Act, which mandates that regulators no longer rely on credit ratings firms, resulting in a new approach that takes into account the quality of the underlying assets.
The approach, analysts said, "provides a far more rational set of risk-weights than either the rating based approach and the December proposal. We view this as a very positive development for the RMBS market. In particular, it eliminates the market’s fear of huge bank selling of 'capital guzzling' senior bonds that are expected to take small losses."
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