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
Exceptions to the general hierarchy of
approaches
Consistent with the New Accord and the
proposed rule, the final rule includes a mechanism that generally prevents a bank’s
effective risk-based capital requirement from increasing
as a result of the bank securitizing its assets.
Specifically, the rule limits a bank’s effective risk-based capital
requirement for all of its securitization exposures to a single securitization to the applicable
risk-based capital requirement if the underlying
exposures were held directly by the bank.
Under the rule, unless one or more of the underlying exposures does not meet the
definition of a wholesale, retail, securitization, or equity exposure, the total risk-based
capital requirement for all securitization exposures held by a single bank associated with a
single securitization (including any regulatory
capital requirement that relates to an
early amortization provision, but excluding any capital requirements that relate to the
bank’s gain-on-sale or CEIOs associated with the securitization) cannot exceed the sum of
(i)
the bank’s total risk-based capital requirement for the underlying exposures
as if the bank directly held the underlying exposures; and
(ii) the bank’s total ECL
for the underlying exposures.
One commenter urged the agencies to delete
the reference to ECL in the capital calculation.
However, the agencies believe
it is appropriate to include the ECL of the underlying exposures in this calculation
because ECL is included in the New Accord’s limit, and because the bank would have had
to estimate the ECL of the exposures and hold reserves or capital against the ECL
if the bank held the underlying exposures on its balance sheet.
This maximum risk-based capital
requirement is different from the general risk based
capital rules.
Under
the general risk-based capital rules, banks generally are required to hold a dollar in capital for
every dollar in residual interest, regardless of the
effective risk-based capital requirement on the underlying
exposures.
The
agencies adopted this dollar-for-dollar capital
treatment for a residual interest to recognize that in
many instances the relative size of the
residual interest retained by the originating bank reveals market information about the
quality of the underlying exposures and transaction structure that may not have been captured
under the general risk-based capital rules.
Given the significantly heightened risk
sensitivity of the IRB approach, the agencies believe that the maximum risk-based
capital requirement in the final rule is appropriate.
The securitization framework also includes
provisions to limit the double counting of risks in
situations involving overlapping securitization exposures.
While
the proposal addressed only those overlapping
exposures arising in the context of exposures to ABCP programs and mortgage loan swaps
with recourse, the final rule addresses overlapping
exposures for securitizations more generally.
If a
bank has multiple securitization exposures that provide
duplicative coverage of the underlying exposures of a securitization (such as when a bank
provides a program-wide credit enhancement and multiple pool-specific liquidity
facilities to an ABCP program), the bank is not required
to hold duplicative risk-based capital against the
overlapping position.
Instead,
the bank would apply to the overlapping position
the applicable risk-based capital treatment under
the
securitization framework that results in the highest
capital requirement.
If
different banks have overlapping exposures to a
securitization, however, each bank must hold capital
against the entire maximum amount of its exposure.
Although
duplication of capital requirements will not occur for
individual banks, some systemic duplication may occur where multiple banks have
overlapping exposures to the same securitization.
The proposed rule also addressed the
risk-based capital treatment of a securitization of non-IRB
assets.
Claims
to future music concert and film receivables are examples of financial assets that are not
wholesale, retail, securitization, or equity exposures.
In these cases, the SFA cannot
be used because of the absence of a risk sensitive
measure of the credit risk of the underlying exposures.
Specifically, under the proposed rule, if a bank had a
securitization exposure and any underlying exposure of the securitization was not a wholesale,
retail, securitization or equity exposure, the bank would
(i) apply the RBA if the
securitization exposure qualifies for the RBA and is not gain-on-sale or a CEIO;
or
(ii)
otherwise, deduct the exposure from total capital.
Numerous commenters asserted that a bank
should be allowed to use the IAA inthese situations since, unlike the SFA,
the IAA is tied to NRSRO rating methodologies rather than
to the risk-based capital requirement for the underlying
exposures.
The agencies believe that this is a reasonable
approach for exposures to ABCP conduits.
The final rule permits a bank to use the IAA
for a securitization exposure for which any underlying exposure of the securitization
is not a wholesale, retail, securitization or equity exposure, provided the
securitization exposure is not gain-on-sale, not a CEIO, and not eligible for the RBA, and all of
the IAA qualification criteria are met.
As described in section V.A.3. of this
preamble, a few commenters asserted that OTC derivatives with a securitization SPE
as the counterparty should be excluded from the definition of securitization exposure.
These commenters objected to the burden of using the securitization framework to
calculate a capital requirement for counterparty credit
risk for OTC derivatives with a securitization SPE.
The
agencies continue to believe that the securitization framework
is the most appropriate way to assess the
counterparty credit risk of such
exposures, and that in many cases the relatively simple RBA will apply to such exposures. In
response to commenter concerns about burden, the agencies have decided to add an optional
simple risk weight approach for certain OTC derivatives.
Under
the final rule, if a securitization exposure is an OTC
derivative contract (other than a credit derivative)
that has a first priority claim on the cash flows from the underlying exposures
(notwithstanding amounts due under interest rate or currency derivative contracts, fees due,
or other similar payments), a bank may choose to apply an effective
100 percent risk weight
to the exposure rather than the general securitization
hierarchy of approaches.
This
treatment is subject to supervisory approval.
Like the proposed rule, the final rule
contains three additional exceptions to the general
hierarchy.
Each
exception parallels the general risk-based capital rules.
First,
an interest-only mortgage-backed security must be assigned
a risk weight that is no less than 100 percent.
Although a number of commenters objected to this risk weight floor on the grounds that it was not risk sensitive,
the agencies believe that a minimum risk weight of 100 percent is prudent in light of the
uncertainty implied by the substantial price volatility of
these securities.
Second,
a sponsoring bank that qualifies as a primary beneficiary
and must consolidate an ABCP program as a
variable interest entity under GAAP generally may exclude the consolidated ABCP program
assets from risk-weighted assets.
In such cases, the bank must hold risk-based
capital against any securitization exposures of the bank to the ABCP program. Third, as
required by Federal statute, a special set of rules applies to transfers of small
business loans and leases with recourse by well capitalized depository institutions.
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