Revisions to the securitisation framework

The Basel Committee on Banking Supervision has today issued revisions to the securitisation framework. The revisions aim to address a number of shortcomings in the Basel II securitisation framework and to strengthen the capital standards for securitisation exposures.

This framework, which will come into effect in January 2018, forms part of the Committee's broader Basel III agenda to reform regulatory standards for banks in response to the global financial crisis and thus contributes to a more resilient banking sector.

The crisis highlighted several weaknesses in the Basel II securitisation framework, including mechanistic reliance on external ratings, lack of risk sensitivity, cliff effects and insufficient capital for certain exposures. The Committee has revised the securitisation framework to address these issues.

The most significant revisions with respect to the Basel II securitisation framework relate to changes in (i) the hierarchy of approaches; (ii) the risk drivers used in each approach; and (iii) the amount of regulatory capital banks must hold for exposures to securitisations (ie the framework's calibration).

The revised hierarchy of approaches reduces reliance on external ratings. It also simplifies and limits the number of approaches. At the top of this hierarchy is the Internal Ratings-Based Approach, which banks may use if their supervisors have approved their use of internal models. This is followed by the External Ratings-Based Approach - where credit ratings are permitted to be used in the jurisdiction - and the Standardised Approach. Additional risk drivers, notably an explicit adjustment to take account of the maturity of a securitisation's tranche, have been introduced in order to address weaknesses in the Basel II framework, which resulted in under-capitalisation of certain exposures.

Compared with the proposals included in the 2013 second consultative document, the final set of requirements published today includes amendments that smooth the impact of maturity on capital charges, along with a number of technical enhancements and clarifications.

Stefan Ingves, Chairman of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank, said "the revised securitisation framework addresses a number of shortcomings of the securitisation market revealed in the financial crisis, and represents a significant improvement to the Basel II framework. The Committee has developed a risk sensitive and prudent framework, while also reducing complexity and a mechanistic reliance on external ratings."

The Basel Committee and the International Organization of Securities Commissions (IOSCO) have been conducting a review of securitisation markets to identify factors that may be hindering the development of sustainable securitisation markets. The Committee and IOSCO have issued today for consultation proposed criteria that could help identify - and assist the financial industry's development of - simple, transparent and comparable securitisations. In 2015, the Committee will consider how to incorporate such criteria into the securitisation capital framework.

The final requirements have incorporated feedback from two rounds of consultation (in December 2012 and December 2013) as well as two quantitative impact studies that helped inform the policy deliberations. The Basel Committee wishes to thank all those who contributed time and effort to express their views during the consultation process.