Basel Committee Softens ABS Risk-Capital Requirements | Practical Law

Basel Committee Softens ABS Risk-Capital Requirements | Practical Law

The BIS and the BCBS issued a new consultative document revising the Basel securitization framework, which includes a lower minimum risk-weight requirement for securitization exposures.

Basel Committee Softens ABS Risk-Capital Requirements

Practical Law Legal Update 8-553-1066 (Approx. 3 pages)

Basel Committee Softens ABS Risk-Capital Requirements

by Practical Law Finance
Published on 26 Dec 2013 • USA (National/Federal)
The BIS and the BCBS issued a new consultative document revising the Basel securitization framework, which includes a lower minimum risk-weight requirement for securitization exposures.
On December 19, 2013, the Bank for International Settlements (BIS) and the Basel Committee on Banking Supervision (BCBS) issued a second consultative document (SCD) revising the Basel securitization framework, which was developed by the BCBS to further its goal of strengthening global capital requirements for bank securitization exposures in response to the global financial crisis. The BCBS drafted the SCD after considering comments received on its first consultative document (FCD) published (see Legal Update, BCBS Consults on Revisions to the Basel Securitization Framework) and the FCD's related quantitative impact study (QIS).
The SCD, as compared to the FCD:
  • Reduces the minimum risk-weight capital requirement for asset-backed securities (ABS) from 20 percent to 15 percent. The risk-weighted capital requirement determines the amount of capital banks must hold against potential losses on ABS. This requirement is still higher than the requirement before the financial crisis, which was seven percent.
  • Contains a different hierarchy of approaches that places less reliance on external credit rating agency ratings (the BCBS has decided to replace the "Modified Supervisory Formula Approach" (MSFA) with the “Internal Ratings-Based Approach”). Under the new SCD hierarchy:
    • banks that have the capacity and appropriate supervisory approval may use an internal ratings-based approach to determine their capital requirement based on the risk of its pool of ABS exposures;
    • if an internal ratings-based approach cannot be used and if the relevant jurisdiction permits, banks may use an external ratings-based approach ; and
    • if neither approach can be used, banks may use a standardized approach based on the capital requirement that would apply under the standardized approach for credit risk.
  • Has a different calibration (or calculation) for each of these approaches because it considers different modeling assumptions. The BCBS revised the calibration to have greater consistency with the underlying internal ratings-based credit-risk framework.
Comments on the SCD are due by March 21, 2014. Once the BCBS has reviewed these comments and the results of the related QIS, it:
  • Will publish the final standard within an appropriate timeframe.
  • Provide sufficient time to banks to implement the standards without the use of grandfathering provisions.