Magazine article American Banker

Could Basel II Have Headed off SIV Woes?: Parsing the Rules' Possible Impact on Off-Sheet Vehicles

Magazine article American Banker

Could Basel II Have Headed off SIV Woes?: Parsing the Rules' Possible Impact on Off-Sheet Vehicles

Article excerpt

WASHINGTON -- Almost as soon as the news broke that some of the largest U.S. banks had agreed to create a fund to relieve problems in the commercial paper market, proponents of the Basel II capital accords began arguing that the situation would have looked significantly different had the new standards already been in place.

But after interviews with Basel II consultants, regulators, and industry representatives, it appears any differences are much more likely to affect European banks, not American ones. What follows are some of the questions central to the discussion of the subject, with answers that represent the current thinking of some of the people most familiar with the issue.

If Basel II had been in place during the past year, would that have had any impact on the creation or use of structured investment vehicles (SIVs)?

Not directly, no. Structured investment vehicles, such as the ones created by Citigroup Inc., are generally totally off-balance-sheet as long as they meet certain accounting criteria determined by the Securities and Exchange Commission. As long as an SIV was off the balance sheet, the bank that created it does not need to hold capital against it. This is true under the current system, Basel I, and the proposed Basel II standards expected to be completed next month.

But some people are arguing Basel II would have an impact. Why is that?

Hope you had your cup of coffee this morning because this gets a little tricky. Put simply: SIVs are backed by so-called liquidity facilities - essentially commitments from the bank that originated the SIV to support it. In essence, it's the promise of a loan or a guarantee backing up the SIV, which is otherwise meant to be independent. Under the original Basel I capital standards, liquidity facilities with less than a one-year commitment (364 days or less) did not have to have capital held against them, while those with longer terms did. …

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