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Fitch sees EU insolvency reform from Basel foreclosure proposal

Fitch Ratings said March 29 that the Basel Committee onBanking Supervision's proposal that only mortgages backed by easily realizablecollateral should benefit from low risk-weightings might encourage insolvencyregime reform in the EU.

The committee wants banks to demonstrate that propertycollateral for mortgages can be foreclosed within "a reasonable period oftime" if they are to continue to benefit from preferential risk weightingsunder the standardized approach to credit risk. If this cannot be achieved,risk weights should rise to 100% for owner-occupier mortgages and 150% forbuy-to-let mortgages.

Fitch noted that timelines for real estate foreclosure andliquidation differed greatly between EU member states and also within countries,depending on insolvency proceedings and court efficiency. If banks operating incountries with long resolution timelines were required to hold more capitalagainst mortgage loans, even after an extended transitional period, this couldgive rise to insolvency law reform in the EU, fitting with the EuropeanCommission's plans to harmonize national insolvency and restructuring laws.

Some countries have already taken steps to reform, includingCyprus and Italy.