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
Ratings-based approach (RBA)
If a securitization exposure is not a
gain-on-sale or CEIO, a bank must apply the RBA to a
securitization exposure if the exposure qualifies for the
RBA.
As a
general matter, an exposure qualifies for the RBA
if the exposure has an external rating from an
NRSRO or has an inferred rating (that is,
the exposure is senior to another securitization exposure in the transaction that has an
external rating from an NRSRO).
For example, a bank generally must use the RBA approach
to determine the risk-based capital requirement for an asset-backed security
that has an applicable external rating of AA+ from an NRSRO and for another tranche of
the same securitization that is unrated but senior in all
respects to the asset-backed security that was rated.
In this
example, the senior unrated tranche would be treated as
if it were rated AA+.
Internal
assessment approach (IAA)
If a securitization exposure does not
qualify for the RBA but the exposure is to an ABCP program – such as a credit
enhancement or liquidity facility – the bank may apply the IAA (if the bank, the exposure, and
the ABCP program qualify for the IAA) or the SFA (if the bank and the exposure qualify
for the SFA) to the exposure.
As a
general matter, a bank will qualify to use the IAA
if the bank establishes and maintains an internal risk rating system for exposures
to ABCP programs that has been approved by the bank’s primary Federal supervisor.
Alternatively, a bank may use the SFA if the bank is able to calculate a set of risk
factors relating to the securitization, including the risk-based capital requirement for the
underlying exposures as if they were held directly by the
bank.
A bank
that qualifies for and chooses to use the IAA must use the
IAA for all exposures that qualify for the IAA.
A number of commenters asserted that a
bank should be permitted to use the IAA for a securitization exposure to an ABCP
conduit even when the exposure has an inferred rating, provided all other IAA eligibility
criteria were met.
The commenters maintained
that the RBA would produce an excessive
risk-based capital requirement for an unrated securitization exposure, such as a
liquidity facility, when the inferred rating is based on a rated security that is very junior to the
unrated exposure.
Commenters suggested that allowing a bank to use the IAA instead of
the RBA in such circumstances would lead to a risk-based capital requirement that was
better aligned with the unrated exposure’s actual
risk.
Like the New Accord, the final rule does
not allow a bank to use the IAA for securitization
exposures that qualify for the RBA based on an inferred
rating.
While in some cases the IAA might produce a more
risk-sensitive capital treatment relative to an inferred rating under the RBA, the
agencies – as well as the majority of commenters – believe that it is important to retain as
much consistency as possible with the New Accord to provide a level international playing
field for financial services providers in a competitive line of business.
The commenters’ concerns relating to inferred ratings apply only to a small proportion of outstanding
ABCP liquidity facilities.
In many
cases, a bank may mitigate such concerns by having
the ABCP program issue an additional,
intermediate layer of externally rated
securities, which would provide a more accurate reference
for inferring a rating on the unrated liquidity facility.
The
agencies intend to monitor developments in this area and, as
appropriate, will coordinate any reassessment of the hierarchy of securitization
approaches with the BCBS and other supervisory and
regulatory authorities.
Supervisory formula approach (SFA).
If a securitization exposure is not a
gain-on-sale or a CEIO, does not qualify for the RBA, and is not an exposure to an ABCP
program for which the bank is applying the IAA, the bank may apply the SFA to the
exposure if the bank is able to calculate the SFA
risk parameters for the securitization.
In many
cases, an originating bank would use the SFA to determine its risk-based capital
requirements for retained securitization exposures.
Deduction
If a securitization exposure is not a
gain-on-sale or a CEIO and does not qualify for the RBA, the IAA, or the SFA, the bank
must deduct the exposure from total capital.
Numerous commenters requested an
alternative to deducting the securitization exposure from capital. Some of these
commenters noted that if a bank does not service the underlying assets, the bank may not be
able to produce highly accurate estimates of a key SFA risk parameter, KIRB,
which is the risk-based capital requirement as if the underlying assets were held directly by
the bank.
Commenters expressed concern that, under the proposal, a bank would be
required to deduct from capital some structured lending products that have long histories
of low credit losses.
Commenters maintained that a bank should be allowed to calculate
the securitization exposure’s risk-based capital requirement using the rules for wholesale
exposures or using an IAA-like approach under which the bank’s internal risk rating for
the exposure would be mapped into an NRSRO’s rating category.
Like the proposal,
the final rule contains
only those securitization approaches in the New Accord. As already noted, the
agencies -- and most commenters -- believe that it is important to minimize substantive
differences between the final rule and the New Accord to
foster international consistency.
Furthermore, the agencies believe that the hierarchy of securitization approaches is
sufficiently comprehensive to accommodate demonstrably
low-risk structured lending arrangements in a
risk-sensitive manner.
As described in greater detail below, for
securitization exposures that are not eligible for the RBA or the IAA, a bank has flexibility
under the SFA to tailor its procedures for estimating KIRB
to the data that are
available.
The agencies recognize that, in light of data shortcomings, a bank may have to use
approaches to estimating KIRB
that are less sophisticated than what the bank might use
for similar assets that it originates, services,
and holds directly.
Supervisors generally
will review the reasonableness of KIRB estimates in the context of available
data, and will expect estimates of KIRB
to incorporate appropriate conservatism to address any
data shortcomings.
Total risk-weighted assets for
securitization exposures equals the sum of risk weighted assets calculated under the RBA, IAA, and
SFA, plus any risk-weighted asset amounts calculated under the early
amortization provisions in section 47 of the final rule.
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