The 2008 financial crisis highlighted several weaknesses in the Basel II securitisation, including concerns that it could generate insufficient capital for some exposures. Although the Basel II framework, based on rating, was implemented in the United States with a few years’ delay, this led the Committee to decide that the securitisation framework should be examined. The Committee identified a number of weaknesses related to the calibration of risk weights and the lack of incentives for good risk management, namely: mechanical dependence on external rating agencies, excessively low risks for highly rated securitisation transactions and, in contrast, excessively high risk weights for low-rated securitisation transactions, the effects of “cliff 1” and insufficient risk sensitivity for the framework.
This securitization framework, which will come into effect in January 2018, is part of the broader Basel III programme for the reform of regulatory standards for banks in response to the global financial crisis and thus contributes to a more resilient banking sector. This framework includes the revised securitisation framework published in December 2014 as well as the alternative capital treatment for “simple, transparent and comparable” securitisations. The objectives and principles that guided the Committee aim to develop a revised securitisation framework that is more risk-sensitive, more conservative in terms of benchmarking but also broadly consistent with the underlying credit risk framework. In addition, it should encourage improved risk management by allocating investment expenses, using the best and most diverse information available to banks. Finally, it should be much simpler, more transparent and allow comparability between banks and jurisdictions. This framework aims to achieve the right balance between these objectives.
The revised Basel III securitisation framework represents a significant improvement over the Basel II framework in terms of reducing the complexity of the hierarchy and the number of approaches. According to the revisions, there are only three primary approaches, as opposed to the multiple approaches and exceptional treatments allowed under Basel II. In addition, the application of the hierarchy no longer depends on the bank’s role in securitization or on the bank’s approach to credit risk applied to the type of underlying exposure. Rather, the revised hierarchy of approaches is based on the information available to the bank and the type of analysis and estimates it can perform on a specific transaction. Mechanical dependence on external notation has been reduced. Not only because the rating-based approach is no longer the preferred approach, but also because other relevant risk factors have been incorporated into the external rating (i. e. maturity and thickness of non-senior tranches).
In terms of risk sensitivity and prudence, the new proposal also represents a step forward compared to what was done in Basel II. Capital requirements have been significantly increased, depending on the risk of exposure to securitisation. However, the capital requirements of upper securitisation positions supported by good quality pools will be subject to risk weights of less than 15%. In addition, the presence of limits on risk weights for higher tranches and limitations on maximum capital requirements are intended to promote consistency with the use of internal rating and not to discourage the use of securitisation of assets with low credit risk.
Banks can also continue to apply the mark-up approach, which was available as part of the agencies’ capital requirements under Basel II. In this approach, the weighting percentage of an asset is based on the amount of assets enhanced by credit2 for which the bank directly or indirectly assumes the credit risk. To calculate the risk weight of a securitisation exposure under the mark-up approach, a banking organisation must provide four data: the amount of exposure in the domestic currency, the pro rata share3, the mark-up amount4 and the applicable risk weight5. A banking organisation shall calculate the amount equivalent to the credit of its exposure by adding the amount of its direct commitment to the product of the increased amount, the proportional share and the applicable risk weighting, provided that the risk is not less than 20%.
In July 2016, the Basel Committee on Banking Supervision published an updated standard for the treatment of regulatory capital for securitisation exposures that includes the treatment of regulatory capital for “simple, transparent and comparable” (STC criteria) securitisations. This standard amends the Committee’s capital standards for securitizations in 2014.
The treatment for STC securitisations is based on the 2015 STC criteria published by the Basel Committee and the International Organisation of Securities Commissions6. The published standard provides additional criteria to differentiate the capitalized treatment of STC securitizations from other securitizations. Additional criteria, for example, exclude transactions in which the normalized risk weights for the underlying assets exceed certain levels. This ensures that securitisations with underlying high-risk exposures are not eligible for the same treatment as transactions that comply with the STC criteria.
Compliance with the broader set of STC criteria should increase confidence in transaction performance and thus justify a modest reduction in the minimum capital requirements for STC securitisations. In November 2015, the Committee consulted on a draft treatment of STC securitisations. Compared to the advisory version, the final standard reduced the risk weights for STC securitisation exposures and reduced the risk weight for exposures above 15% to 10%.
The new banking solvency standards (Basel III/CRD 4) restrict banks’ ability to finance the economy. Ten years after the start of the 2007 crisis, securitisation is an alternative, especially when we see that banking supervisors are pushing banks to reduce their balance sheets on real estate outstandings to individuals whose volumes are very significant.