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The Bank for International Settlements (BIS) in Basle has thrown up more surprises in its progress toward the new capital adequacy accord, commonly known as Basle II. The bank's latest publication Changes to the Securitisation Framework, released in January continues the trend by confounding market scepticism over the accord's treatment of securitisation.
When the BIS announced a major shake-up to the securitisation elements of Basle II in its third consultative paper (CP3) in October 2003, most observers felt the changes would push back the schedule for implementation, jeopardising the proposed finalisation date of summer 2004. Central banks around the world are scheduled to adopt the new accord in 2006.
Most significantly the bank had declared that due to widespread market concern the supervisory formula approach (SFA), used to calculate risk weightings for unrated securitisation positions, would be replaced with a new, unspecified model.
But the January report revealed that considerable progress had been made on all aspects of the accord, especially improving the treatment of securitisation. Among other things, the report aligned the treatments of originating and investing banks, introduced an internal assessment approach for conduit exposures and offered a simplified SFA, thus meeting the industry's main demands.
The BIS declared it was on track to meet the summer deadline, and would be reviewing the outstanding issues at its next meeting in May.
SFA overhauled
One of the most glaring inconsistencies in CP3 was the way originating banks and investing banks could face different capital charges for the same exposure. If an originating bank held a position with credit enhancement...