Basel
ii in the United States of America
From the
Basel ii
Compliance Professionals Association (BCPA),
the largest association of Basel ii Professionals in the
world
Final Rule, USA: Risk-Based Capital Standards:
Advanced Capital Adequacy Framework — Basel II
CRM for
securitization exposures
The treatment of CRM for securitization
exposures differs from that applicable to wholesale and
retail exposures, and is largely unchanged from the
proposal.
An originating bank that has obtained a
credit risk mitigant to hedge its securitization exposure to a synthetic or traditional
securitization that satisfies the operational criteria in section 41 of the final rule may recognize
the credit risk mitigant, but only as provided in section 46 of the final rule.
An investing
bank that has obtained a credit risk mitigant to hedge a securitization exposure also may
recognize the credit risk mitigant, but only as provided
in section 46.
A bank
that has used the RBA or IAA to calculate its risk-based capital requirement for a securitization
exposure whose external or inferred rating (or equivalent internal rating under the IAA)
reflects the benefits of a particular credit risk mitigant provided to the associated
securitization or that supports some or all of the
underlying exposures, however, may not use
the securitization credit risk mitigation rules to further reduce its risk-based capital
requirement for the exposure based on that credit risk mitigant.
For example, a bank that
owns a AAA-rated asset-backed security that benefits from an insurance wrap that is
part of the securitization transaction must calculate its
risk-based capital requirement for the security strictly
under the RBA.
No
additional credit is given for the presence of the
insurance wrap.
On the
other hand, if a bank owns a BBB-rated asset-backed
security and obtains a credit default swap from a
AAA-rated counterparty to protect the bank
from losses on the security, the bank would be able to apply the securitization CRM
rules to recognize the risk mitigating effects of the
credit default swap and determine the
risk-based capital requirement for the position.
As under the proposal, the final rule
contains a treatment of CRM for securitization exposures separate from the
treatment for wholesale and retail exposures because the wholesale and retail exposure
CRM approaches rely on substitutions of, or adjustments
to, the risk parameters of the hedged exposure.
Because
the securitization framework does not rely on risk parameters
to determine risk-based capital requirements for securitization exposures, a different
treatment of CRM for securitization exposures is
necessary.
The securitization CRM rules, like the
wholesale and retail CRM rules, address collateral
separately from guarantees and credit derivatives.
A bank
is not permitted to recognize collateral other than financial
collateral as a credit risk mitigant for
securitization exposures.
A bank
may recognize financial collateral in determining the bank’s risk-based capital requirement for
a securitization exposure that is not a repo-style transaction, an eligible margin loan, or
an OTC derivative for which the bank has reflected collateral in its determination
of exposure amount under section 32 of the rule
by using
a collateral haircut approach.
The
bank’s risk-based capital requirement for a collateralized securitization exposure is
equal to the risk-based capital requirement for the securitization exposure as calculated
under the RBA or the SFA multiplied by the ratio of adjusted exposure amount (SE*) to original
exposure amount (SE), where:
(i) SE* = max {0, [SE - C x (1 - Hs - Hfx)]};
(ii) SE = the amount of the securitization
exposure (as calculated under section 42(e) of the rule);
(iii) C = the current market value of the
collateral;
(iv) Hs = the haircut appropriate to the
collateral type; and
(v) Hfx = the haircut appropriate for any
currency mismatch between the collateral and the exposure.
Where the collateral is a basket of
different asset types or a basket of assets denominated
in different currencies, the haircut on
the basket is
where ai
is the current market value of the asset in the basket
divided by the current market value of all assets in the basket and Hi
is the haircut
applicable to that asset.
With the prior written approval of its
primary Federal supervisor, a bank may calculate haircuts using its own internal
estimates of market price volatility and foreign exchange volatility, subject to the
requirements for use of own-estimates haircuts contained
in section 32 of the rule.
Banks
that use own-estimates haircuts for collateralized securitization exposures
must assume a minimum holding period (TM)
for securitization exposures of 65 business
days.
A bank that does not qualify for and use
own-estimates haircuts must use the collateral type haircuts (Hs) in Table 3
of the final rule and must use a currency mismatch haircut (Hfx) of 8 percent if the exposure
and the collateral are denominated in different
currencies.
To
reflect the longer-term nature of securitization exposures
as compared to securities financing transactions,
however, these standard supervisory haircuts (which are based on a ten-business-day holding period
and daily marking-to-market and remargining) must be adjusted to a
65-business-day holding period (the approximate number of business days in a calendar
quarter) by multiplying them by the square root of
6.5
(2.549510).
A bank
also must adjust the standard supervisory haircuts upward
on the basis of a holding period longer than
65
business days where and as appropriate to take into account the illiquidity of the
collateral.
A bank may only recognize an eligible
guarantee or eligible credit derivative provided by an eligible securitization
guarantor in determining the bank’s risk-based capital
requirement for a securitization exposure.
The
definitions of eligible guarantee and eligible credit derivative apply to
both the wholesale and retail frameworks and the securitization framework.
An eligible
securitization guarantor is defined to mean
(i) a sovereign entity, the Bank for
International Settlements, the International Monetary
Fund,
the European Central Bank, the European
Commission, a Federal Home Loan Bank, the Federal Agricultural Mortgage Corporation
(Farmer Mac), a multilateral developmentbank, a depository institution (as defined
in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813)), a bank holding
company (as defined in section 2 of the Bank Holding Company Act (12 U.S.C. 1841)), a
savings and loan holding company (as
defined in 12 U.S.C. 1467a) provided all
or substantially all of the holding company’s activities are permissible for a financial
holding company under 12 U.S.C. 1843(k)), a foreign bank (as defined in section 211.2
of the Federal Reserve Board’s Regulation K (12 CFR
211.2)), or a securities firm;
(ii) any
other entity (other than a securitization SPE) that has issued and outstanding an
unsecured long-term debt security without credit enhancement that has a long-term
applicable external rating in one of the three highest investment-grade rating categories; or
(iii) any other entity (other than a securitization SPE) that has a PD assigned by the bank
that is lower than or equivalent to the PD associated with a long-term external
rating in the third-highest investment-grade rating category.
A bank must use the following procedures
if the bank chooses to recognize an eligible guarantee or eligible credit
derivative provided by an eligible securitization guarantor in determining the bank’s
risk-based capital requirement for a securitization
exposure.
If the
protection amount of the eligible guarantee or eligible
credit derivative equals or exceeds the amount of the
securitization exposure, the bank must set the
risk weighted asset amount for the securitization
exposure equal to the risk-weighted asset amount for a direct exposure to the
eligible securitization guarantor (as determined in the wholesale risk weight function described
in section 31 of the final rule), using the bank’s
PD for the guarantor, the bank’s LGD for
the guarantee or credit derivative, and an EAD equal to the amount of the securitization
exposure (as determined in section 42(e) of the final rule).
If the protection amount of the eligible
guarantee or eligible credit derivative is less than the amount of the securitization
exposure, the bank must divide the securitization exposure into two exposures
in order to recognize the guarantee or credit derivative.
The
risk-weighted asset amount for the securitization exposure
is equal to the sum of the risk-weighted asset amount for
the covered portion and the risk-weighted asset amount for
the uncovered portion.
The
risk-weighted asset amount for the covered portion is equal to the risk-weighted
asset amount for a direct exposure to the eligible securitization guarantor (as determined in
the wholesale risk weight function described in section 31 of the rule), using the bank’s
PD for the guarantor, the bank’s LGD for the guarantee or credit derivative, and an EAD
equal to the protection amount of the credit risk mitigant.
The
risk-weighted asset amount for the uncovered portion is
equal to the product of
(i) 1.0 minus the ratio of the
protection amount of the eligible guarantee or eligible
credit derivative divided by the amount of the
securitization exposure; and
(ii) the risk-weighted asset amount for the
securitization exposure without the credit risk mitigant (as determined in sections 42-45 of the
final rule).
For any hedged securitization exposure,
the bank must make applicable adjustments to the protection amount as
required by the maturity mismatch, currency mismatch, and lack of restructuring
provisions in paragraphs (d), (e), and (f) of section 33 of the final rule.
The
agencies have clarified in the final rule that the
mismatch provisions apply to any hedged securitization
exposure and any more senior securitization exposure that
benefits from the hedge.
In the
context of a synthetic securitization, when an eligible
guarantee or eligible credit derivative covers multiple
hedged exposures that have different residual maturities,
the bank must use the longest residual maturity of any of
the hedged exposures as the residual maturity of all the
hedged exposures.
If the
risk-weighted asset amount for a guaranteed securitization exposure is greater than the risk-weighted
asset amount for the securitization exposure without the guarantee or credit
derivative, a bank may elect not to recognize the guarantee or credit derivative.
When a bank recognizes an eligible
guarantee or eligible credit derivative provided by an eligible securitization
guarantor in determining the bank’s risk-based capital requirement for a securitization
exposure, the bank also must
(i) calculate ECL for the protected portion of the exposure
using the same risk parameters that it uses for
calculating the risk-weighted asset amount
of the exposure (that is, the PD associated with the guarantor’s rating grade, the LGD
of the guarantee, and an EAD equal to the protection amount of the credit risk
mitigant); and
(ii) add this ECL to the bank’s total ECL.
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