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From Banking and Finance Law Daily, November 10, 2015

Basel Committee proposes favorable capital treatment for safer securitizations

By Richard A. Roth, J.D.

The Basel Committee on Banking Supervision is asking for comments on appropriate regulatory capital requirements for simple, transparent, and comparable (STC) securitizations. Securitizations meeting the criteria for being considered simple, transparent, and comparable should pose less risk and therefore should merit capital treatment that is different from other securitizations, the committee says. Comments on “Capital Treatment for ‘Simple, Transparent and Comparable’ Securitisations” are due by Feb. 5, 2016.

According to the committee:

  • simplicity means securitizing underlying assets that are similar to each other, using a transaction structure that is not excessively complex;

  • transparency means giving investors information about the underlying assets, the transaction structure, and the parties that will allow investors to understand the risks; and

  • comparability means assisting investors to compare investments within asset classes so they can better compare risks.

A securitization that meets these criteria will pose less asset risk, less structural risk, and less operational and governance risk, the committee believes. Investors will be better able to assess the risks of an investment before they buy. A list of 14 specific criteria for what makes a securitization simple, transparent, and comparable was announced in July 2015 (see Banking and Finance Law Daily, July 23, 2015).

Capital treatment advantages. The committee explains the basis for suggesting a favorable capital treatment for STC securitizations by saying that “All other things being equal, a securitisation with lower structural risk needs a lower capital surcharge than a securitisation with higher structural risk; and a securitisation with less risky underlying assets requires a lower capital surcharge than a securitisation with riskier underlying assets.” The current proposal offers criteria for favorable treatment that are more precise than the previous 14-point list.

The consultative paper identifies what it terms the “most material enhancements to the criteria” as:

  • more explicit requirements for the minimum performance history of the underlying assets;

  • the exclusion of securitizations if the standardized risk weighting of the underlying assets exceeds a specified threshold;

  • a more explicit definition of the granularity of the pool of underlying assets so that no single exposure could exceed more than 1 percent of the pool; and

  • higher fiduciary and contractual responsibilities that generally would require the originator of the underlying assets and the servicer of those assets to be either served by the same legal entity or affiliates with a common parent entity.

The proposal also would impose on originators, investors, and financial institution supervisors the duty to ensure that a securitization actually meets the STC criteria.

MainStory: TopStory CapitalBaselAccords FinancialStability SecuritiesDerivatives

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