BIS Raises Questions On Subprime Index - WSJ

FRANKFURT -- The prices of a key index that banks use to gauge their subprime-related losses have been damped partly by factors that have little to do with the risk that borrowers could default on mortgages, according to a Bank for International Settlements report. The report could add to concern about how markets measure the severity of mortgage-debt problems. The BIS report released Sunday also says global banks have been funneling more funds out of the U.S. than into it since market turmoil erupted in the summer of 2007. Dollar's Role BIS data suggest that foreign banks hungry for dollars could be sending funds from U.S. branches to their offices abroad, while global lending to U.S. nonfinancial firms has begun flattening after years of growth. The Switzerland-based BIS, often called the central bankers' central bank, has few formal banking duties but is a hub for economic research and global policy makers. Its quarterly report studies a widely used measure of the subprime-mortgage market called the ABX. Run by Markit Group Ltd., the ABX is an index that tracks the value of securities backed by subprime loans. Because such securities barely trade, the ABX gets direction from actively traded instruments that insure against default on the securities, called credit-default swaps. The ABX often is used as a proxy for the value of mortgage-backed securities. Swiss bank UBS AG used the ABX in 2007 to help estimate an additional $10 billion write-down on its subprime- mortgage investments. Housing-market factors including the likelihood that borrowers could default on mortgages have contributed to sharp declines in the ABX since last summer. But the BIS report also says that "declining risk appetite and rising concerns about market illiquidity have provided a sizable contribution to the observed collapse in ABX prices." Other market observers have said ABX prices have been driven down largely by bearish traders. The BIS found that ABX indexes tracking highly rated securities, such as those with triple-A ratings, were particularly sensitive to investor fears that had little to do with default risk. That could suggest investors are using the indexes "as a macro hedge or to express negative trading views on the U.S. housing market," according to the BIS. A BIS study in June suggested estimates of triple-A subprime-security losses that rely on the ABX could be overstated by more than 60%, because the index only covers part of the capital structure of relevant deals. Separately, the BIS report said that, from 2000 though the middle of 2007, global banks funneled more than $1 trillion more into the U.S. across their balance sheets than they withdrew. But since mid-2007, banks have sent about $321 billion more out of the U.S. than they sent in. One potential cause: "a broader shift in bank balance sheets away from the U.S. nonbank private sector."