A new era of lower capital requirements

This article, from Matthew Salisbury of Volterra Consulting, considers the effect of the revised Basel framework on the capital requirements of UK mortage lenders. He examines the two types of capital standards regime from which lenders can choose and analyses the likely effects of choosing one over the other.

Executive Summary

New capital standards following from the revised Basel framework come into force on 31 December 2006. Mortgage lenders face a choice between two regimes:

• the standardised approach, similar to the current system, or 
• the internal ratings based (IRB) approach, where their own experience of arrears and defaults can be used to assess what capital they need to put aside.

Based on data from the Council of Mortgage Lenders, there is good reason to expect that the IRB approach will offer a significantly lower level of capital requirement for mortgage lenders than either the standardised approach or the current requirements.

Estimates indicate that adopting an IRB approach could cut credit risk capital requirements on standard mortgages by between 45 and 65 per cent, compared with the standardised approach.

To read the full article, click here.

(First published in Mortgage Finance Gazette, European Supplement 2005)