-- Daniel O’Leary
The Bank of England could be given greater scope to increase capital charges for securitizations under new powers to change risk weight for deals retained in banking and trading books. Michael McKee, partner at DLA Piper, said the powers will funnel into the BoE’s new responsibilities as the main regulatory overseer, part of the new U.K. government’s shake-up of financial regulation.
“[HM] Treasury's new consultation envisages the BoE’s powerful new Financial Stability Committee could require regulators to increase risk weights if they considered certain types of securitization were becoming more risky,” McKee noted.
Risk-weighted assets are integral to the Basel II capital requirement. The risk calculation determines the capital needed to hold against credit risk. McKee said the regulatory reforms will see the BoE play a more direct role in the U.K.’s macroeconomic health.
While regulators see the need to retain flexibility with respect to risk weights, an increase in the requirement is seen by industry players as making securitization more expensive to carry out, potentially dampening demand.
HM Treasury announced the sweeping financial reforms yesterday, which will see the Financial Services Authority eventually scrapped. The ruling U.K. coalition government plans to replace the FSA with the Prudential Regulation Authority and the Consumer Protection and Markets Authority. PRA will be responsible for supervising individual financial firms, while CPMA will focus on regulating retail and conduct in financial markets. Treasury plans to have a....