Basel III could mean banks will shun securitisation

Basel III rules could result in a long-term closure of the securitisation markets, according to JPMorgan Cazenove.

In a report, the investment bank says the Basel III rules for securitisation risk weights mean that securitisation will become less attractive to banks as it will be more of a burden on capital and returns will be lower.

The paper says: “Basel III securitisation risk-weighted asset rules could lead to a long-term securitisation market closure, with banks generating returns on equity of just 8-12%, leading to an exit of the securitisation business by investment banks.” (article continues below)

Tony Ward, chief executive of Home Funding, says: “The Bank of England’s financial stability report in June showed the UK banking sector needs to find around £750 billion -£800 billion by the end of 2012. This can really only be achieved by issuing long-term covered bonds or RMBS.

“If you have not got anything to substitute it with, you are going to build in new economics for the higher capital requirement for holding subordinated funds. This means you will have to pay more for bonds and you will have to pass it on to borrowers.”