Momentum Builds for Inclusion of MBS for Basel III Liquidity Rules

Basel Committee members met last week and Reuters reports that committee members may be coming around to the idea of broadening the types of assets that can be counted towards the new Basel III short-term liquidity rules.  Scheduled to go into full effect in 2015, the original rules severely restrict the types of assets that can be utilized by global financial institutions to meet the new guidelines.  As we have reported in the past, banks are not waiting to make adjustments in how they manage their balance sheet and the negative effects are already apparent.

Most notably, banks would no longer be able to utilize mortgage-backed securities, a long time staple in their portfolios, to meet the new test.  A derivative of this restriction is the elimination of the utilization of mortgage servicing rights (“MSRs”) as an eligible asset for meeting the liquidity guidelines.

It now seems very likely that the original definition of asset types that might be utilized to meet the new Basel rules will be altered and it seems a cinch to many that covered bonds and highly rated corporate bonds will find their way into a revised definition.  There is growing momentum to add mortgage-backed securities as well.  The European Central Bank, apparently feeling some pressure from it smaller member countries, seems to be lobbying for the addition of mortgage-backs to that list of eligible assets.  We completely agree with those that contend that such a move would provide a big boost to the securitization markets.

Allowing the banks to resume their position as a key group of  “net-buyers” of mortgage-backed securities and other ABS will restore a vital “source of demand” for new issuance.  The sooner the better!

About markferraris
Managing Principal Orchard Street Partners LLC

2 Responses to Momentum Builds for Inclusion of MBS for Basel III Liquidity Rules

  1. Basel says:

    Majority of people that request for loans from banks use mortgage properties as collateral and therefore exuding mortgage backed securities from the Basel III liquidity rules would mean that banks will have fewer people asking for loans. This can explain why there has been a lot of support for inclusion of mortgage back securities in the liquidity rules, but it is also important to note that mortgage backed securities primarily depend on whether a country has a thriving construction industry.

    • markferraris says:

      Probably true but the scenario we are discussing here are mortgages which are typically originated, packaged and then sold as securities. Basel III currently prohibits banks from continuing the practice of counting these securities against their capital requirements. Banks typically feel comfortable holding and evaluating mortgage-backed securities because they understand the origination and underwriting process and can match up the associated risk profile with their own mortgage lending activities.

      You are correct that a correlated activty that may be negatviely impacted could very well be allowing borrowers to utilize real estate to backstop new loans. Again, the comfort level of many banks in this area is high. Whether the value of these real estate backed loans is signficant enough to have a material impact on liquidity ratios or if the structures are eligible for utilization against these new liqudity ratios is probably debatable. – Editor

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