The Basel Committee on Banking Supervision has proposed to relax securitization capital charges will lead to “meaningful reductions” in capital requirements.
The final risk weighting the Committee proposes in its second consultative paper sets the minimum risk weighting for securitization at 15%, instead of the 20% floor originally proposed in 2012.
Banks may also opt to 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,” said the Committee in a press release.
Banks that can’t use the internal ratings-based on a particular securitization exposure would employ an external ratings-based approach.
If neither of these approaches can be used, a standardized approach would be applied. This is based on the underlying capital requirement that would apply under the standardized approach for credit risk, and other risk drivers.
“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 securitization exposures are supported by an appropriate amount of capital,” said Stefan Ingves, chairman of the Basel Committee and governor of Sweden’s Central Bank, Sveriges Riksbank.