Post by M Evans on Dec 12, 2008 23:52:19 GMT 4
With banks struggling to limit damage from the credit crunch, Basel II couldn't have been introduced at a worse time. Banks have felt compelled to put off-balance sheet vehicles back onto their books, but under Basel II this could be penalised.
"Banks mustn't provide implicit support to off-balance sheet vehicles or, under Basel II, they'll get the regulatory equivalent of a public flogging," said Bob Penn, a regulatory specialist at Allen & Overy.
Financial institutions could be banned from creating new off-balance sheet vehicles – including structured investment vehicles, special purpose vehicles and vehicles which issue collateralised debt obligations and collateralised loan obligations – if they provide support to an existing off-balance sheet vehicle.
Before the new Europe-wide regime, the FSA required banks to make declarations about the true sale of assets and the bankruptcy remoteness of the vehicle to which they were sold.
But before Basel II became law, there was no adverse consequence for the banks if they made these declarations only to take the vehicle back onto the balance sheet at a later date. Several banks, such as HSBC and Citigroup, have taken Sivs back onto their balance sheets to avoid a loss of reputation or legal action in recent months.
If banks do this now, they could see the off-balance sheet aspect of their business curtailed.
"The question is the extent to which regulators will take the action they're required to take against banks which take vehicles back onto balance sheet," said Penn. "I expect our friendly regulator to pay them a lot more attention."