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)
Under the final rule, as under the
proposal, a bank must determine the risk weighted asset amount for a securitization exposure
that is eligible for the RBA by multiplying the amount of the exposure by
the appropriate risk-weight provided in the tables in
section 43 of the rule.
Under
the proposal, whether a securitization exposure was eligible for the RBA would depend on
whether the bank holding the securitization exposure is an
originating bank or an investing bank.
An
originating bank would be eligible to use the RBA for a
securitization exposure if
(i) the exposure had two or
more external ratings, or
(ii) the
exposure had two or more inferred ratings.
In
contrast, an investing bank would be eligible to use
the RBA for a securitization exposure if the
exposure
has one or more external or inferred ratings.
A bank
would be an originating bank if it
(i) directly or indirectly
originated or securitized the underlying exposures included in the securitization, or
(ii)
serves as an ABCP program sponsor to the securitization.
The proposed rule defined an external
rating as a credit rating assigned by a NRSRO to an exposure, provided
(i) the
credit rating fully reflects the entire amount of credit
risk with regard to all payments owed to the holder of the
exposure, and
(ii) the external rating is published in an
accessible form and is included in the transition matrices made publicly available by the
NRSRO that summarize the historical performance of
positions it has rated.
For
example, if a holder is owed principal and interest on an exposure, the credit rating
must fully reflect the credit risk associated with timely
repayment of principal and interest.
Under
the proposed rule, an exposure’s applicable external rating was the lowest
external rating assigned to the exposure by any NRSRO.
The proposed two-rating requirement for
originating banks was the only material difference between the treatment of
originating banks and investing banks under the proposed
securitization framework.
Although
the two-rating requirement is not included in the New Accord, it is generally
consistent with the treatment of originating and investing
banks in the general risk-based capital rules.
The
agencies sought comment on whether this treatment was appropriate,
and on possible alternative mechanisms that could be employed to ensure the
reliability of external and inferred ratings on
securitization exposures retained by
originating banks.
Commenters generally objected to the
two-rating requirement for originating banks.
Many
asserted that since the credit risk of a given
securitization exposure was the same regardless of the holder, the
risk-based capital treatments also should be the same.
Because external ratings would be publicly
available, some commenters contended that NRSROs will have strong reputational
reasons to give unbiased ratings—even to nontraded
securitization exposures retained by originating banks.
The
agencies continue to believe that external ratings for
securitization exposures retained by an originating bank, which typically are not traded, are
subject to less market discipline than ratings for exposures sold to third parties.
This
disparity in market discipline warrants more stringent
conditions on use of the former for risk-based capital
purposes.
Accordingly, the final rule retains the two-rating
requirement for originating banks.
Consistent with the New Accord, the final
rule states that an unrated securitization exposure has an inferred rating if another
securitization exposure issued by the same issuer and secured by the same underlying
exposures has an external rating and this rated reference exposure
(i) is subordinate in
all respects to the unrated securitization exposure;
(ii) does not benefit from any credit
enhancement that is not available to the unrated
securitization exposure; and
(iii)
has an effective remaining maturity that is equal to or
longer than the unrated securitization exposure.
Under
the RBA, securitization exposures with an inferred rating are treated the
same as securitization exposures with an identical
external rating.
This
definition does not permit a bank to assign an inferred
rating based on the ratings of the underlying exposures
in a securitization, even when the unrated securitization
exposure is secured by a single, externally rated
security.
In
particular, such a look-through approach would fail to
meet the requirements that the rated reference
exposure must be issued by the same
issuer, secured by the same underlying assets, and subordinated in all respects to the
unrated securitization exposure.
The agencies sought comment on whether
they should consider other bases for inferring a rating for an unrated
securitization position, such as using an applicable
credit rating on outstanding long-term debt of
the issuer or guarantor of the securitization exposure.
In
situations where an unrated securitization exposure
benefited from a guarantee that covered all contractual
payments associated with the securitization exposure, several commenters advocated
allowing an inferred rating to be assigned based on the long-term rating of the guarantor.
In addition, some commenters recommended that if a senior, unrated securitization
exposure is secured by a single externally rated underlying security, a bank should be
permitted to assign an inferred rating for the
unrated exposure using a look-through
approach.
The agencies do not believe there is a
compelling need at this time to supplement the New
Accord’s methods for determining an inferred rating.
However,
if a need develops in the future, the agencies will
seek to revise the New Accord in coordination
with the BCBS
and other supervisory and regulatory authorities.
In the
situations cited above, the framework already provides
simplified methods for calculating a securitization
exposure’s risk-based capital requirement.
For
example, when a securitization exposure benefits from a full guarantee, such as
from an externally rated monoline insurance company, the
exposure’s external rating often will reflect that
guarantee.
When the guaranteed securitization exposure is not
externally rated, subject to the rules for recognition of guarantees of
securitization exposures in section 46, the unrated securitization exposure may be treated as
a direct (wholesale) exposure to the guarantor.
In addition, when a securitization
exposure to an ABCP program is secured by a single, externally rated asset, a look-through
approach may be possible under the IAA provided that such a look-through is no less
conservative than the applicable NRSRO rating methodologies.
Under the proposal, if a securitization
exposure had multiple external ratings or multiple inferred ratings, a bank would be
required to use the lowest rating (the rating that would
produce the highest risk-based capital requirement).
Commenters objected that this treatment was significantly more
conservative than required by the New Accord, which permits use of the second most
favorable rating, and would unfairly penalize banks in
situations where the lowest rating was unsolicited or an
outlier.
The
agencies recognize commenters’ concerns regarding
unsolicited ratings, and note that the New
Accord
states banks should use solicited ratings.
To
maintain consistency with the general risk-based capital rules, the
final rule defines the applicable external rating of a securitization exposure to be its lowest
solicited external rating and the applicable inferred rating of a securitization
exposure to be the inferred rating based on its lowest solicited external rating.
For securitization exposures eligible for
the RBA, the risk-based capital requirement per dollar of securitization
exposure depends on four factors:
(i) the
applicable rating of the exposure;
(ii)
whether the rating reflects a long-term or short-term
assessment of the exposure’s credit risk;
(iii)
whether the exposure is a “senior” exposure; and
(iv) a
measure of the effective number (“N”) of underlying
exposures.
In response to a specific question posed by
the agencies, commenters generally supported linking risk weights under the RBA to
these factors.
In the proposed rule, a “senior
securitization exposure” was defined as a securitization exposure that has a first
priority claim on the cash flows from the underlying exposures, disregarding the
claims of a service provider (such as a swap counterparty or trustee, custodian, or
paying agent for the securitization) to fees from the securitization.
Generally,
only the most
senior tranche of a securitization would be a senior securitization exposure.
For
example, if multiple tranches of a securitization share the transaction’s highest rating, only the
tranche with the shortest remaining maturity would be treated as senior, since other
tranches with the same rating would not have a first claim
to cash flows throughout their lifetimes.
A
liquidity facility that supports an ABCP program would be a senior
securitization exposure if the liquidity facility provider’s right to reimbursement of the
drawn amounts was senior to all claims on the cash flows from the underlying exposures
except claims of a service provider to fees.
In the
final rule, the agencies modified this definition to
clarify two points.
First, in the context of an ABCP
program, the final rule specifically states that both the
most senior commercial paper issued by the program and a
liquidity facility supporting the program may be ‘senior’
exposures if the liquidity facility provider’s right to
reimbursement of any drawn amounts is senior to all claims
on the cash flow from the underlying exposures.
Second, the final rule
clarifies that when determining whether a securitization
exposure is senior, a bank is not required to consider any
amounts due under interest rate or currency derivative
contracts, fees due, or other similar payments.
Consistent with the New Accord, a bank
must use Table F below when a securitization exposure qualifies for the
RBA based on a long-term external rating or an inferred
rating based on a long-term external rating.
A bank
may apply the risk weights in column 1 of Table F to the
securitization exposure only if the N is six or more and
the securitization exposure is a senior securitization
exposure.
If N is
six or more but the securitization exposure is not a senior
securitization exposure, the bank must apply the risk
weights in column 2 of Table F.
Applying
the principle of conservatism, however, if N is six or more a bank may use the
risk weights in column 2 of Table F without determining whether the exposure is
senior. A bank must apply the risk weights in column 3 of Table F to the securitization
exposure if N is less than six.
In
certain situations the rule provides a simplified approach
for determining N.
If the notional number of underlying
exposures of a securitization is 25 or more or if all the underlying exposures are retail exposures,
a bank may assume that N is six or more (unless the bank
knows or has reason to know that N is less than six).
However,
if the notional number of underlying exposures of
a securitization is less than 25 and one or
more of the underlying exposures is a
non-retail exposure, the bank must compute N as described in the SFA section below.
A few commenters wanted to determine N
only at the inception of a securitization transaction, due
to the burden of tracking N over time.
The
agencies believe that a bank must track N over time to
ensure an appropriate risk-based capital requirement.
The number of underlying exposures in a
securitization typically changes over time as some underlying exposures are repaid or
default. As the number of underlying exposures changes, the risk profile of the
associated securitization exposures changes, and a bank must reflect this change in risk profile in its
risk-based capital requirement.
A bank must apply the risk weights in
Table G when the securitization exposure qualifies for the RBA based on a
short-term external rating or an inferred rating based on
a short-term external rating.
A bank
must apply the decision rules outlined in the previous paragraph to determine which column of Table G
applies.
Within
Tables G and H, risk weights increase as rating grades
decline.
Under column 2 of Table F, for example, the risk
weights range from 12 percent for exposures with the highest investment-grade rating
to 650 percent for exposures rated one category below
investment grade with a negative designation.
This
pattern of risk weights is broadly consistent with analyses employing
standard credit risk models and a range of assumptions regarding correlation effects
and the types of exposures being securitized.
These analyses imply that, compared with a
corporate bond having a given level of standalone credit risk (for example, as measured by
its expected loss rate), a securitization tranche having the same level of
stand-alone credit risk – but backed by a reasonably granular and diversified pool – will tend
to exhibit more systematic risk.
This effect is most pronounced for below-investment-grade tranches and is the primary reason why the
RBA risk-weights increase rapidly as
ratings deteriorate over this range – much more rapidly than for similarly rated corporate
bonds.
Under the RBA, a securitization exposure
that has an investment-grade rating and has fewer than six effective underlying
exposures generally receives a higher risk weight than a similarly rated securitization
exposure with six or more effective underlying
exposures.
This treatment is intended to
discourage a bank from engaging in regulatory capital arbitrage by securitizing very
high-quality wholesale exposures (wholesale exposures with a low PD and LGD),
obtaining external ratings on the securitization exposures issued by the securitization,
and retaining essentially all the credit risk of the pool of underlying exposures.
A bank must deduct from regulatory capital
any securitization exposure with an external or inferred rating lower than one
category below investment grade for long-term ratings or below investment grade for
short-term ratings.
Although this treatment is more conservative than suggested by credit risk
modeling analyses, the agencies believe that deducting such exposures from regulatory
capital is appropriate in light of significant
modeling uncertainties for such low-rated
securitization tranches.
Moreover, external ratings of these tranches are subject to
less market discipline because these positions
generally are retained by the bank and are
not traded.
The most senior tranches of granular
securitizations with long-term investment grade external ratings receive a more favorable
risk weight as compared to more subordinated tranches of
the same securitizations.
To be
considered granular, a securitization must have an N of at least
six. Consistent with the New Accord, the lowest possible risk-weight, 7 percent, applies
only to senior securitization exposures receiving
the highest external rating (for example,
AAA) and backed by a granular asset pool.
The agencies sought comment on how well
the risk weights in Tables G and H capture the most important risk factors
for securitization exposures of varying degrees of seniority and granularity.
A number of commenters contended that, in the interest of competitive equity, the risk weight for
senior securitization exposures having the highest rating and backed by a granular asset pool
should be 6 percent, the level specified in the European Union’s Capital Requirements
Directive (CRD).
The
agencies decided against making this change.
There is
no compelling empirical evidence to support a 6 percent risk weight for all exposures satisfying
these conditions and, further, a 6 percent risk weight is
inconsistent with the New Accord.
Moreover, estimates of the credit risk associated with such positions tend to be
highly sensitive to subjective modeling assumptions and to the specific types of
underlying assets and structure of the transaction,
which supports the use of the more
conservative approach in the New Accord.
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