Proposed Revisions To Basel Securitisation Framework

 
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Keywords: proposed revisions, Basel securitisation framework, banking supervision.

In December 2012 the Basel Committee on Banking Supervision (BCBS) published a consultation paper (BCBS 236)1 proposing substantial changes to the methods banks use to calculate risk-based capital requirements related to securitisation exposures (Proposal). The Proposal's stated objectives are to make securitisation capital requirements more prudent and risk-sensitive, to lessen reliance on external credit ratings, and to reduce "cliff effects" (in which small differences in credit quality or other parameters produce large differences in capital requirements). Comments on the Proposal are due 15 March 2013.

The Proposal would change the securitisation framework within the Basel II bank capital requirements framework (Basel II)2 that BCBS adopted in 2004 and to which it made some amendments, collectively known as Basel II.5,3 following the financial crisis of 2008. The member states of the European Union and many other countries have already implemented Basel II and Basel II.5 and are in the process of adopting and implementing Basel III.4 The United States, however, never fully implemented Basel II, and in 2012 its bank regulators proposed rules to implement modified versions of

Basel II and II.5 as well as Basel III.5 Some elements of the Proposal resemble elements of the US proposed rules.

Highlights of the proposal are as follows:

BCBS is considering two alternative hierarchies of approaches for determining risk weights of securitisation exposures. The two alternative hierarchies (Alternative A and Alternative B) are significantly different from each other and from those included in the standardised approach (SA) and the internal ratings-based approach (IRB) under the Basel II securitisation framework. BCBS has proposed, for both alternative hierarchies, a revised ratings-based approach (Revised RBA or RRBA) based on the ratings-based approach (RBA) used in the Basel II IRB, a modified supervisory formula approach (MSFA) based on the supervisory formula approach (SFA) used in the Basel II IRB, and a simplified supervisory formula approach (SSFA) similar to that included in the US proposals. Both alternative hierarchies also make use of "concentration ratio" approaches based on risk weights of the underlying securitised exposures. Under Alternative B, a concentration ratio approach (CRKIRB) based on the weighted average risk weights of underlying exposures determined under the IRB (KIRB) would be used to determine securitisation risk weights of exposures other than senior high-quality exposures. Under both alternative hierarchies, a backstop concentration ratio approach (BCRA) based on risk weights of underlying exposures determined according to the SA (KSA) would be used to determine risk weights of exposures where other methods could not be used, as a backstop before applying a risk weight of 1250%. A similar concentration ratio approach, based on risk weights determined under the revised securitisation framework, would be used to determine risk weights of all re-securitisation exposures. Securitisation exposures would have a minimum risk weight of 20%, rather than 7% as under the Basel II IRB. Re-calibration of the ratings-based and supervisory formula approaches would result in higher risk weights for high credit quality exposures and lower risk weights for some lower credit quality exposures. The concentration ratio approaches, when applied to securitisation approaches other than the most junior tranches, result in relatively high-risk weights because they do not take account of the credit protection provided by the junior tranches. Under both the MSFA and the RRBA, risk weights would vary according to maturity of the securitisation exposure (and not just the underlying exposures), with a minimum of one year and a maximum of five years. For this purpose, the tranche maturity would be determined based on mandatory contractual cash flows of the securitisation tranche rather than those of the underlying assets. So, for an asset-backed security with a typical "pass-through" structure, the maturity would be the legal final maturity (which typically falls up to two years later than the latest contractual maturity of the underlying assets). BCBS will conduct a quantitative impact study (QIS) on the Proposal beginning during the period for comments on the Proposal and will consider the comments and QIS results in formulating a revised securitisation framework. Alternative hierarchies

Under Alternative A, for a bank to determine the risk weight of any...

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