www.mfgonline.co.uk/mortgages/130584/144/Regulation/Cap -
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Published on: 1/1/2008
Last Visited: 4/28/2008
"We've seen some enormous implied capital savings for mortgage lenders where capital has fallen very dramatically - in one case, the calculated figure dropped to 20 per cent of what it had been beforehand," says Will Cook, head of Basel solutions with economic consulting firm Volterra in London.
Capital savings
He cautions that savings of this magnitude wouldn't be achievable in practice.For a start, the Financial Services Authority (FSA) has ruled that capital requirements at IRB lenders will wind down from their current levels over a two-year period, in order to avoid an overnight step-change in the industry's total capital.More importantly, capital requirements are not just determined by the risks lurking in the loan book - market, operational and other risks also have to be taken into account - but he insists there are still "huge savings to be made."
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The latter approach is the one favoured by the FSA, says Cook - but it's also the most difficult, as the tricky issue of rating migration through the credit cycle needs to be addressed.