The Bank for International Settlements has issued a second consultative paper on revisions to the Basel securitization framework. Following on their December 2012 proposal paper, this December 19, 2013 paper comprises a detailed set of proposals, including draft standards text, for a comprehensive revision of the treatment of securitisation within the risk-based capital framework. This second consultation paper is part of the Basel Committee’s broader agenda to reform regulatory standards for banks based on lessons learned from the global financial crisis.
The December 2013 paper takes into account comments received on the 2012 proposals as well as the results of the related quantitative impact study. Basically, the Basel Committee has proposed a simple framework akin to that used for credit risk:
- Where banks have the capacity and supervisory approval to do so, they may use an internal ratings-based approach to determine the capital requirement based on the risk of the underlying pool of exposures, including expected losses. The internal ratings-based approach is risk-sensitive, yet relatively easy to use and supervise.
- If this internal ratings-based approach cannot be used for a particular securitisation exposure, an external ratings-based approach may be used (assuming that the use of ratings is permitted within the relevant jurisdiction). Unlike the existing securitisation approach, however, capital requirements need not be based on external ratings if they are available; furthermore, some jurisdictions may not wish to use this approach at all.
- Finally, if neither of these approaches can be used, a standardised approach would be applied. This is based on the underlying capital requirement that would apply under the standardised approach for credit risk, and other risk drivers.
The Basel Committee has refined and simplified the proposed framework from the earlier proposals in several ways:
In reviewing the calibration of the approaches, the Committee has revised some of the modelling assumptions behind the original calibration proposed in the first consultative document. These changes result in greater consistency with the underlying credit risk framework. They would lead to meaningful reductions in capital requirements vis-à-vis the initial proposals, yet would remain more stringent than under the existing framework. The Committee also proposes to set a 15% risk-weight floor for all approaches, instead of the 20% floor originally proposed.
The Committee believes that a simpler set of approaches, more aligned to the underlying capital framework, and a revised calibration should serve the Committee’s goal of ensuring that securitisation exposures are supported by an appropriate amount of capital. Comments on the proposals should be uploaded by Friday, March 21, 2014.