The Basle Committee signaled last week that it still intends to meet its self-imposed June deadline for the final draft of the new Accord. To that end, the committee released a series of proposed revisions based on recommendations that followed the release of the October 2003 third consultative paper (CP3).
Bankers urged the committee to simplify the treatment of securitizations by revising the complicated Supervisory Formula Approach (SFA). Bankers argue that the proposed capital charge to liquidity facilities and revolving exposures is too high. They also suggest a new approach in treating rated "super-senior" CDS, explained analysts at Dresdner Kleinwort Wasserstein.
While more detailed comments are expected in coming weeks, the committee released a preliminary response earlier this month pledging to address the concerns and recommendations submitted by the European banking industry last October (see ASR 10/20/03). Regulators have agreed to simplify the treatment of securitization-related exposures, according to a statement released last week. The committee has made several changes to the internal ratings based (IRB) approach and has heeded a call for more internal uniformity among the proposals comprising the securitization framework.
In October, bankers submitted proposed revisions to the SFA that determines capital holdings for unrated securitization exposure. The SFA is meant to be used in the case of unrated exposures by the originating banks. The investing banks are required to use the Ratings Based Approach (RBA) unless they receive the regulatory permission to use the SFA and have access to KIRB information.
Under the SFA, the capital charge for a securitization tranche depends on five bank-supplied inputs: KIRB, or the Internal Ratings Based capital charge if the underlying exposures had not been securitized; the tranche's credit enhancement level; the tranche's thickness (relative share in the overall capital structure); the pool's effective number of loans; and the pool's weighted average loss given default rates. The securitization RBA is equivalent to the IRB approach for corporates.
Industry analysts said there may be enhancements to the standardized approach that finetune the risk weightings, perhaps more in line with credit ratings and other factors to determine the risk characteristics of a securitized pool of assets. These could include a pool's granularity (number of assets in the pool) and diversification.
The committee agreed to simplify the treatment of securitizations-related exposures and align it more closely with industry practices. Under the new guidelines, both originating and investing banks could opt to apply the RBA for rated securitization exposures.
"The implications from the final outcome of Basle II for the securitization market can be twofold," explained Dresdner analysts. "On the supply side, new securitization structures may emerge to arbitrage and/or enable banks to sell the tranches rated below BB+ and the first loss piece. In addition, depending on the objectives of different banks (i.e. funding needs, risk transfer, etc.), the ABS market asset type mix may change."
At this stage, it is difficult to know how the final approach will change deals going forward. "On the demand side, an investor base for the first loss piece and junior tranches would need to be developed (e.g. entities not regulated by Basle II, such as hedge funds and insurance companies), in particular for the asset types that originators are mostly likely to be incentivized to securitize (e.g. CMBS, large corporate exposures)," said analysts.
For more detailed information on the committee's response to the October recommendations, log onto www.bis.org. Working groups are expected to submit their responses to the proposed revisions at the next meeting in May.
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