The Frankowski Firm

Basel May Provide Tougher Rules for Asset Backed Securities

The Basel Committee on Banking Supervision is posed to review how securitization is regulated globally in response to concerns that current regulations are not reducing excessive risk tasking, according to a recent Bloomberg.com article.

The Basel Committee is associated with the Bank for International Settlements and is a forum for regular cooperation on banking supervisory matters. The Committee consists of members from 27 different countries and is best known for its international standards on capital adequacy- the core principle for effective banking operations.

The article discussed a few of the main focuses of the Basel Committee. One is a review of the liquidity coverage ratio (LCR), which was last tweaked two years ago. The ratio relates to the amount of easy to sell assets a bank has on hand and the ratio relates to how much the bank should have in order to weather a 30 day credit squeeze. Responding to calls from the Euro Central Bank and the Bank of France, the Basel Committee will explore a possible expansion of the list of assets banks can use to meet the LCR. The LCR ratio currently has many asset backed securities, which are financial products whose value derives from assets such as loans or credit card debts rather than mortgages.

Another focus for the Basel Committee during their review is to come to a decision whether to allow banks to use more contingent-convertible bonds (CoCos) to meet their capital requirements. CoCos are a fixed income security that automatically converts into ordinary shares is a bank’s capital falls through a predetermined floor. The CoCos have two prices, unlike a traditional convertible bond that just has a strike price. After the strike price, which is the cost of the stock when the bond converts into stock, there is another price. This price is even higher than the strike price and it is what the company’s stock price must reach before an investor has the right to make the conversion.

The Basel Committee has set their 2013 priorities, which includes the above issues as well as reviewing a separate liquidity rule for lenders, a net stable funding ratio and studying possible changes to capital rules banks face on assets they intend to trade.


If you or someone you know has lost money as a result of an asset backed investment, please contact Richard Frankowski at 205-747-1903 to discuss your potential legal remedies.

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