Second Working Paper on the Treatment of Asset Securitisations

The current Basel Accord contains very little guidance on the treatment of securitisation transactions. Given the large and rapidly growing securitisation markets, a robust treatment of securitisations is seen as an essential component of the Basel II framework. Without such a treatment, the new Accord would not achieve the objectives set out by the Basel Committee on Banking Supervision (the Committee).

The Committee therefore has sought to develop a capital treatment for securitisation exposures. The Committee's first consultative paper (released in June 1999) introduced a securitisation proposal. This original proposal was expanded upon in the Committee's second consultative package (released in January 2001). Those proposals primarily focused on the standardised treatment to traditional securitisations. Generally, banks were required to assign risk weights to securitisation exposures based on a few observable characteristics, such as the presence of an issue rating. Risk transfer requirements for traditional securitisations were also provided.

After consulting with the industry and conducting additional analyses, the Committee released a first Working Paper on asset securitisation in October 2001. The aim was to issue for consultation an internal ratings-based (IRB) treatment for securitisations together with treatments of synthetic securitisations¹, liquidity facilities and securitisations of revolving credit exposures containing early amortisation features. Release of the working paper prompted more dialogue with the industry and further study on the part of the Committee's Securitisation Group. The outcome of these efforts is reflected in Section IV (Credit Risk - Securitisation Framework) of the QIS 3 Technical Guidance. The relevant section of the Technical Guidance is attached to this paper in Annex 3.²

The purpose of this second Working Paper (WP 2) is to discuss some of the new elements of the securitisation framework, such as improvements made to the IRB treatment, as well as those concerning liquidity facilities and structures containing early amortisation features. They are all aimed at improving the risk-sensitivity of the minimum capital requirements. The Committee is also seeking input on the supervisory review component (pillar 2) of the securitisation framework, the text of which is provided in Annex 4. As with other areas of the New Basel Capital Accord, the Committee is interested in obtaining feedback from banking organisations on its proposals for securitisations³. The information collected will play an important role in determining whether further modifications are needed. Such modifications may include refinements to existing proposals or adjustments to the way in which the proposed minimum capital requirements have been calibrated.

¹⁾ As specified in paragraph 558 of Annex 3, the IRB treatment for securitisation is a treatment available (and mandatory) for banks that have received supervisory approval to use the IRB approach for the relevant asset class. This treatment differs from the IRB approach for the relevant asset class in that it is not based on banks' estimates of PDs or LGDs of the individual securitisation exposures

²⁾ "Quantitative Impact Study 3 Technical Guidance", Basel Committee on Banking Supervision, October 2002.

³⁾ Any feedback on the securitisation proposals should be sent to the relevant national supervisory authorities and central banks, as well as to the Secretariat of the Basel Committee on Banking Supervision at the Bank for International Settlements, CH-4002 Basel, Switzerland, by 20 December 2002. Such feedback may be submitted via email: BCBS.capital@bis.org or by fax: +41 61 280 9100. Please use this e-mail address only for providing written submissions and not for correspondence. Such submissions will not be posted to the BIS website.