Final Rule, USA: Risk-Based Capital Standards:
Advanced Capital Adequacy Framework — Basel II
Amount of a securitization exposure
Under the proposed rule, the amount of an
on-balance sheet securitization exposure was the bank’s carrying value, if
the exposure was held-to-maturity or for trading, or the bank’s carrying value
minus any unrealized gains and plus any unrealized losses
on the exposure, if the exposure was available-for-sale.
In
general, the amount of an off-balance sheet securitization
exposure was the notional amount of the exposure.
For an OTC derivative contract that was
not a credit derivative, the notional amount was the EAD of the derivative contract (as
calculated in section 32).
In the final rule the agencies are
maintaining the substance of the proposedprovision on the
amount of a securitization exposure with one exception.
The
final rule provides that the amount of a
securitization exposure that is a repo-style transaction,
eligible margin loan, or OTC derivative
(other than a credit derivative) is the EAD of the
exposure as calculated in section 32 of the final rule.
The
agencies believe this change is consistent with the way banks manage these
exposures, more appropriately reflects the collateral that directly supports these
exposures, and recognizes the credit risk mitigation
benefits of netting where these exposures are part of a
cross-product netting set.
Because the collateral associated with a repo-style
transaction or eligible margin loan is reflected in the determination of exposure amount
under section 32 of the rule, these transactions are not eligible for the general
securitization collateral approach in section 46(b) of the
final rule.
Similarly, if a bank chooses to reflect collateral
associated with an OTC derivative contract in its determination
of exposure amount under section 32 of the rule, it may not also apply the general
securitization collateral approach in section 46(b) of the final rule.
Similar to the definition of EAD for on-balance sheet exposures, the agencies are clarifying that the amount of an
on-balance sheet securitization exposure is based on whether or not the exposure is classified
as an available for sale security.
Under the proposal, when a securitization
exposure to an ABCP program takes the form of a commitment, such as a
liquidity facility, the notional amount could be reduced to the maximum potential amount
that the bank currently would be required to fund under the arrangement’s documentation
(the maximum potential amount that could be drawn given the assets currently held
by the program).
Within some ABCP programs, however, certain commitments, such as
liquidity facilities, may be dynamic in that the maximum amount that can be drawn at any
moment depends on the current credit quality of the
program’s underlying assets.
That is,
if the underlying assets were to remain fixed, but their credit quality deteriorated, the
maximum amount that could be drawn against the liquidity facility could increase.
The final rule clarifies that in such
circumstances the notional amount of an off balance sheet securitization exposure to an ABCP
program may be reduced to the maximum potential amount that the bank
could be required to fund given the program’s current assets (calculated without regard
to the current credit quality of these assets).
Thus, if $100 is the maximum amount that
could be drawn given the current volume and current credit quality of the program’s
assets, but the maximum potential draw against these same assets could increase to as
much as $200 if their credit quality were to deteriorate, then the exposure amount is
$200.
Some commenters recommended capping the
securitization amount for an ABCP liquidity facility at the amount of the
outstanding commercial paper covered by that facility.
The
agencies believe, however, that this would be
inappropriate if the liquidity provider could be required
to advance a larger amount.
The
agencies note that when calculating the exposure amount of a
liquidity facility, a bank may take into account any limits on advances – including limits
based on the amount of commercial paper outstanding – that are contained in the
program’s documentation.
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