Wednesday, 25 February 2009

Basel committee still clueless chumps

They say... CDOs of ABS (so-called "resecuritisations") are more highly correlated with systematic risk than are traditional securitisations. Resecuritisations, therefore, warrant a higher capital charge. Fine so far. But then look what they do:(The new capital charges are in the grey hatched columns.) So the capital charge for a senior charge of a AAA-rated CDO-squared will be 1.6% of notional (20% x 8%). Anyone who thinks this is adequate was clearly taught in the Jimmy Cayne school of Structured Finance.

Update. I'll try to post more on the Basel 2 revisions (and in particular the trading book changes) in a few days. Meanwhile here is some good sense from Adair Turner, via the FT:
Lord Turner told a hearing of the Treasury select committee that tougher measures would include requiring banks to hold up to three times as much capital against their trading assets.

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Blogger peterxyz said...

that would be 20% x 7% ?

9:50 pm  
Blogger David Murphy said...

The entries are risk weights in percent, so the capital charge is the magic Basel 1 8% times the risk weight. Thus a A- rated tranche of a CDO squared would attract a risk weight of 60% of 8% of notional, i.e. 4.8%. Note that mezz of mezz was one of the nastiest things that you could buy in 2006-7...

6:54 am  

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