Tom Braithwaite Brooke Masters
US banks fear that any recovery in the country?s housing market will be delayed because of moves to remove credit ratings from regulations, which will boost banks? capital requirements by billions of dollars.
Bankers have until Friday to respond to a proposal by the Federal Reserve and other regulators that would increase the ?risk weights? on securitised assets, driving up sharply the equity capital that banks are forced to set against them.
Securitisations are financial products that bundle loans and then sell off slices with different levels of risk. About 700 bank representatives dialled into a conference call set up by the Office of the Comptroller of the Currency this month to discuss the move. Of particular interest is the impact on ?private-label? securitisations of mortgages without government guarantees, a part of the credit market thought to be crucial for the revival of the housing market.
Hugh Carney, senior counsel at the American Bankers Association, said: ?If regulators don?t get the securitisation risk weights correct and you have these punitive capital charges applied to securitisations, it?s tough to see how you get the private mortgage market back.?
The proposal stems from the Dodd-Frank law, which ordered US regulators to remove references to credit ratings because of their inadequacies and conflicts of interest highlighted during the financial crisis.
But banks are complaining that the proposal will hand a competitive advantage to overseas rivals. They say that besides toughening their capital requirements, the Fed?s complex alternative system is less sensitive to deteriorating assets. The new system incorporates ratings for sovereign debt from the Organisation for Economic Co-operation and Development, which currently places Greece in its least-risky category even though the market is pricing in a substantial risk of default.
The proposal, published at the end of December, has caused alarm, with bankers and lawyers saying markets have yet to appreciate its impact. JPMorgan analysts wrote that, because securitisations will attract a minimum 20 per cent risk weighting compared with a minimum 7 per cent in Europe and the rest of the world, that would reduce capital ratios at Goldman Sachs and Morgan Stanley.