In a new report, Fitch Ratings says that the new capital adequacy framework for large global banks, known as Basel II, will have an important effect on the securitisation activity of banks.

A report published by Fitch explores the quantitative impact of the Basel II capital charges on a range of structured transactions typical of deals in the marketplace. Fitch evaluates the amount of capital that banks must hold on an unsecuritised pool of assets under Basel II in comparison to holding a securitised structure of these same assets.

Fitch finds that banks could potentially face lower capital charges by investing in rated securitisation structures rather than by directly holding a comparable pool of unsecuritised assets, particularly for credit card asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), and residential mortgage-backed securities (RMBS). “Looking ahead, we may see banks looking for opportunities to reduce their Basel II capital requirements by investing in the credit card ABS, CMBS, and RMBS markets,” said Stuart Jennings, managing director, European structured finance, Fitch Ratings.

Fitch also notes that Basel II could influence how banks structure their securitisation deals. “Banks will face strong pressures under Basel II to minimise their exposure to sub-investment grade tranches, given the significant amount of regulatory capital they will have to hold against these positions,” according to Krishnan Ramadurai, senior director, financial institutions, Fitch Ratings.

The firm concludes that the ultimate effect of Basel II on the securitisation markets will depend in large part on how banks identify and respond to these new regulatory capital incentives. “The impact of Basel II on a bank’s decision to securitise a portfolio of assets will depend on a complicated interplay of factors, including, for example, the inherent default risk and recovery rates of the underlying assets, the type of asset or product being securitised, the tranching of the resulting securitisation structure, and the features or conventions of the structuring process, such as excess spread and reserve funds,” said Kim Olson, managing director, Algorithmics.