By Jane Baird
LONDON, March 2 (Reuters) – New bank capital rules could deal the final blow to any resurgence of deals in synthetic collateralised debt obligations as well as hurt the value of $330 billion of existing triple-A tranches, Goldman Sachs said.
Proposed changes to Basel II rules, effective end-2010, would increase bank capital requirements by an estimated 11.5 percent overall and 223.7 percent in the trading book, according to a study by the Bank for International Settlements.
At the height of the financial crisis, fears of a market meltdown and defaults of investment-grade credits such as Lehman Brothers drove spreads of synthetic CDOs, also known as collateralised synthetic obligations (CSOs), sharply wider.
Spreads have since largely recovered, and a smattering of new deals have been done, but credit strategists at Goldman Sachs see the potential for new pain.
“For banks, this would mean a much higher cost for running the CSO issuance business,” said strategists Charles Himmelberg, Albert Gallo, Lotfi Karoui and Annie Chu in a note to investors.