Market participants are still poring over final capital rules for U.S. banks to ascertain the impact on securitized assets, but an early reading from Barclays is that they are likely positive for non-agency remics and mildly positive for some other assets, such as bonds backed by student loans.
The impact on other sectors is likely to mixed.
Among other things, the final package of Basel III capital rules approved by the Federal Reserve July 2 outline a new framework for calculating risk weights on securitization exposures held by U.S. banks. With a few exceptions, Barclays said in research published this morning, they are very similar to those that were proposed in June 2012.
In particular, small- and medium-sized U.S. banks (those that hold less than $250 billion in consolidated assets and less than $10 billion of on-balance-sheet foreign exposures) are required to use one of two approaches to determine risk weights on their holdings of asset-backeds, including RMBS, CMBS, and ABS.
In the Simplified Supervisory Framework Approach (SSFA), banks don’t rely on the credit rating of a securitization to determine how much capital to hold against it; instead, they rely on a formula that includes the delinquency rates and risk weights of the underlying assets in the securitization.
Analysts at Barclays said that, relative to the old capital rules, this formula generally results in lower capital requirements on older, riskier securities and higher capital requirements on some less risky (investment-grade mezzanine) securities.
The final rule did make some clarifications, however, and one of these is that re-remics holding only a single securitization exposure that has been re-tranched are not considered re-securitizations. Therefore, they are not penalized with a higher capital requirement.
Barclays said this change “should be beneficial for senior re-remic positions, as the original methodology was very punitive on these securities. Indeed, the change in the way capital requirements are calculated for re-remics could lead to increased issuance, if banks that had been hesitant to invest in the sector for capital reasons return to the market.”
The other path, known as the gross-up approach, entails applying a risk weight that basically mirrors the risk weighting of the underlying loans. Barclays added that this method “heavily penalizes” mezzanine securities, even if they are rated investment grade.
Issuers must choose a single for the entire capital stack of a deal, Barclays said.
Another change in the final rules could be positive for student loan securitizations: banks can now exclude the deferral of principal and interest on loans to students still in school from their calculation of 90-day delinquency rates. That’s because the deferral is unrelated to the performance of the loan. Retail credit cards, which often for the deferral of interest and principal in order to attract new borrowers, may also benefit, Barclays said.
Impact on Large Banks
Under the new rules, larger banks are subject to something called the supervisory formula approach (SFA) — not to be confused with SSFA — which requires them to determine capital requirements on securitizations. But only if all of the data needed in the formula are available.
However larger banks have to wait until July 9 to get a final reading on the supplementary leverage ratio charge when the FDIC plans to discuss the topic, said Standard & Poor’s in a research note today.
S&P said it expects the ending leverage requirement to be higher than the current 3%.
“We estimate most banks are already compliant with a 5% requirement based on the Fed's previous proposal, although language on denominator calculations will be key,” said analysts in the note.
The Fed has also elected to use Basel 1 risk weightings of 50% vs. the 35% to 100% proposed under Basel III, for residential mortgages and home equity loans (100% vs. 100-200%).
