Resources for Basel II Capital Accord (Basel II)
Basel II failing to prevent high-risk fund losses?
www.chasecooper.com Sean Egan of new-breed US ratings agency, Egan-Jones Ratings, raises the question of whether Basel II is providing sufficient protection against current developments in global mortgage lending and calls for more realistic ratings regarding mortgage securities, particularly regarding the higher-risk sub-prime assets.
Egan uses the recent failures of two Bear Stearns hedge funds to illustrate his arguments. These were rated AAA, the same level as the secure US Treasury bonds, or one rate lower at AA, and at 15%, exceeded the Basel II required debt to equity ratios. Yet the two funds were wiped out and lost US$ 1.5 billion.
As Egan points out, the days when a mortgage lender evaluated the borrowers ability to pay are long past. In the modern securitised mortgage market, all parties brokers, bankers, secondary lenders and ratings firms only earn revenues if the deal goes through. As the ratings are used to calculate capital requirements, the agencies are under pressure to keep their ratings high. For example, under Basel II, US$ 100 of AAA securitised assets requires 56 US cents of equity to back up the debt, whereas the same value of BBB assets require US$ 4.80. Moodys have said that it lost market share when it toughened up its ratings.
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