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Basel ii Accord Section 560 to 605

D. Treatment of securitisation exposures
 
1. Calculation of capital requirements
 
560. Banks are required to hold regulatory capital against all of their securitisation
exposures, including those arising from the provision of credit risk mitigants to a
securitisation transaction, investments in asset-backed securities, retention of a subordinated tranche, and extension of a liquidity facility or credit enhancement, as set forth in the following sections. Repurchased securitisation exposures must be treated as retained
securitisation exposures.
 
(i) Deduction
 
561. When a bank is required to deduct a securitisation exposure from regulatory capital,
the deduction must be taken 50% from Tier 1 and 50% from Tier 2 with the one exception
noted in paragraph 562. Credit enhancing I/Os (net of the amount that must be deducted
from Tier 1 as in paragraph 562) are deducted 50% from Tier 1 and 50% from Tier 2.
Deductions from capital may be calculated net of any specific provisions taken against the
relevant securitisation exposures.
 
562. Banks must deduct from Tier 1 any increase in equity capital resulting from a
securitisation transaction, such as that associated with expected future margin income (FMI) resulting in a gain-on-sale that is recognised in regulatory capital. Such an increase in capital is referred to as a “gain-on-sale” for the purposes of the securitisation framework.
 
563. For the purposes of the EL-provision calculation as set out in Section III.G,
securitisation exposures do not contribute to the EL amount. Similarly, any specific
provisions against securitisation exposures are not to be included in the measurement of
eligible provisions.
 
(ii) Implicit support
 
564. When a bank provides implicit support to a securitisation, it must, at a minimum,
hold capital against all of the exposures associated with the securitisation transaction as if
they had not been securitised. Additionally, banks would not be permitted to recognise in
regulatory capital any gain-on-sale, as defined in paragraph 562. Furthermore, the bank is
required to disclose publicly that (a) it has provided non-contractual support and (b) the
capital impact of doing so.
 
2. Operational requirements for use of external credit assessments
 
565. The following operational criteria concerning the use of external credit assessments
apply in the standardised and IRB approaches of the securitisation framework:
 
(a) To be eligible for risk-weighting purposes, the external credit assessment must take
into account and reflect the entire amount of credit risk exposure the bank has with
regard to all payments owed to it. For example, if a bank is owed both principal and
interest, the assessment must fully take into account and reflect the credit risk
associated with timely repayment of both principal and interest.
 
(b) The external credit assessments must be from an eligible ECAI as recognised by
the bank’s national supervisor in accordance with paragraphs 90 to 108 with the
following exception. In contrast with bullet three of paragraph 91, an eligible credit
assessment must be publicly available. In other words, a rating must be published in
an accessible form and included in the ECAI’s transition matrix. Consequently,
requirement.
 
(c) Eligible ECAIs must have a demonstrated expertise in assessing securitisations,
which may be evidenced by strong market acceptance.
 
(d) A bank must apply external credit assessments from eligible ECAIs consistently
across a given type of securitisation exposure. Furthermore, a bank cannot use the
credit assessments issued by one ECAI for one or more tranches and those of
another ECAI for other positions (whether retained or purchased) within the same
securitisation structure that may or may not be rated by the first ECAI. Where two or
more eligible ECAIs can be used and these assess the credit risk of the same
securitisation exposure differently, paragraphs 96 to 98 will apply.
 
(e) Where CRM is provided directly to an SPE by an eligible guarantor defined in
paragraph 195 and is reflected in the external credit assessment assigned to a
securitisation exposure(s), the risk weight associated with that external credit
assessment should be used. In order to avoid any double counting, no additional
capital recognition is permitted. If the CRM provider is not recognised as an eligible
guarantor in paragraph 195, the covered securitisation exposures should be treated
as unrated.
 
(f) In the situation where a credit risk mitigant is not obtained by the SPE but rather
applied to a specific securitisation exposure within a given structure (e.g. ABS
tranche), the bank must treat the exposure as if it is unrated and then use the CRM
treatment outlined in Section II.D or in the foundation IRB approach of Section III, to
recognise the hedge.
 
3. Standardised approach for securitisation exposures
 
(i) Scope
 
566. Banks that apply the standardised approach to credit risk for the type of underlying
exposure(s) securitised must use the standardised approach under the securitisation
framework.
 
(ii) Risk weights
 
567. The risk-weighted asset amount of a securitisation exposure is computed by
multiplying the amount of the position by the appropriate risk weight determined in
accordance with the following tables. For off-balance sheet exposures, banks must apply a
CCF and then risk weight the resultant credit equivalent amount. If such an exposure is
rated, a CCF of 100% must be applied. For positions with long-term ratings of B+ and below
and short-term ratings other than A-1/P-1, A-2/P-2, A-3/P-3, deduction from capital as
defined in paragraph 561 is required. Deduction is also required for unrated positions with
the exception of the circumstances described in paragraphs 571 to 575.
 
 
(95) The rating designations used in the following charts are for illustrative purposes only and do not indicate any preference for, or endorsement of, any particular external assessment system.
 
568. The capital treatment of positions retained by originators, liquidity facilities, credit
risk mitigants, and securitisations of revolving exposures are identified separately. The
treatment of clean-up calls is provided in paragraphs 557 to 559.
 
Investors may recognise ratings on below-investment grade exposures
 
569. Only third-party investors, as opposed to banks that serve as originators, may
recognise external credit assessments that are equivalent to BB+ to BB- for risk weighting
purposes of securitisation exposures.
 
Originators to deduct below-investment grade exposures
 
570. Originating banks as defined in paragraph 543 must deduct all retained
securitisation exposures rated below investment grade (i.e. BBB-).
 
(iii) Exceptions to general treatment of unrated securitisation exposures
 
571. As noted in the tables above, unrated securitisation exposures must be deducted
with the following exceptions: (i) the most senior exposure in a securitisation, (ii) exposures
that are in a second loss position or better in ABCP programmes and meet the requirements
outlined in paragraph 574, and (iii) eligible liquidity facilities.
 
Treatment of unrated most senior securitisation exposures
 
572. If the most senior exposure in a securitisation of a traditional or synthetic
securitisation is unrated, a bank that holds or guarantees such an exposure may determine
the risk weight by applying the “look-through” treatment, provided the composition of the
underlying pool is known at all times. Banks are not required to consider interest rate or
currency swaps when determining whether an exposure is the most senior in a securitisation
for the purpose of applying the “look-through” approach.
 
573. In the look-through treatment, the unrated most senior position receives the average
risk weight of the underlying exposures subject to supervisory review. Where the bank is
unable to determine the risk weights assigned to the underlying credit risk exposures, the
unrated position must be deducted.
 
Treatment of exposures in a second loss position or better in ABCP programmes
 
574. Deduction is not required for those unrated securitisation exposures provided by
sponsoring banks to ABCP programmes that satisfy the following requirements:
 
(a) The exposure is economically in a second loss position or better and the first loss
position provides significant credit protection to the second loss position;
 
(b) The associated credit risk is the equivalent of investment grade or better; and
 
(c) The bank holding the unrated securitisation exposure does not retain or provide the
first loss position.
 
575. Where these conditions are satisfied, the risk weight is the greater of (i) 100% or (ii)
the highest risk weight assigned to any of the underlying individual exposures covered by the facility.
 
Risk weights for eligible liquidity facilities
 
576. For eligible liquidity facilities as defined in paragraph 578 and where the conditions
for use of external credit assessments in paragraph 565 are not met, the risk weight applied
to the exposure’s credit equivalent amount is equal to the highest risk weight assigned to any of the underlying individual exposures covered by the facility.
 
(iv) Credit conversion factors for off-balance sheet exposures
 
577. For risk-based capital purposes, banks must determine whether, according to the
criteria outlined below, an off-balance sheet securitisation exposure qualifies as an ‘eligible
liquidity facility’ or an ‘eligible servicer cash advance facility’. All other off-balance sheet
securitisation exposures will receive a 100% CCF.
 
Eligible liquidity facilities
 
578. Banks are permitted to treat off-balance sheet securitisation exposures as eligible
liquidity facilities if the following minimum requirements are satisfied:
 
(a) The facility documentation must clearly identify and limit the circumstances under
which it may be drawn. Draws under the facility must be limited to the amount that is
likely to be repaid fully from the liquidation of the underlying exposures and any
seller-provided credit enhancements. In addition, the facility must not cover any
losses incurred in the underlying pool of exposures prior to a draw, or be structured
such that draw-down is certain (as indicated by regular or continuous draws);
 
(b) The facility must be subject to an asset quality test that precludes it from being
drawn to cover credit risk exposures that are in default as defined in paragraphs 452
to 459. In addition, if the exposures that a liquidity facility is required to fund are
externally rated securities, the facility can only be used to fund securities that are
externally rated investment grade at the time of funding;
 
(c) The facility cannot be drawn after all applicable (e.g. transaction-specific and
programme-wide) credit enhancements from which the liquidity would benefit have
been exhausted; and
 
(d) Repayment of draws on the facility (i.e. assets acquired under a purchase
agreement or loans made under a lending agreement) must not be subordinated to
any interests of any note holder in the programme (e.g. ABCP programme) or
subject to deferral or waiver.
 
579. Where these conditions are met, the bank may apply a 20% CCF to the amount of
eligible liquidity facilities with an original maturity of one year or less, or a 50% CCF if the
facility has an original maturity of more than one year. However, if an external rating of the
facility itself is used for risk-weighting the facility, a 100% CCF must be applied.
 
Eligible liquidity facilities available only in the event of market disruption
580. Banks may apply a 0% CCF to eligible liquidity facilities that are only available in the
event of a general market disruption (i.e. whereupon more than one SPE across different
transactions are unable to roll over maturing commercial paper, and that inability is not the
result of an impairment in the SPEs’ credit quality or in the credit quality of the underlying
exposures). To qualify for this treatment, the conditions provided in paragraph 578 must be
satisfied. Additionally, the funds advanced by the bank to pay holders of the capital market
instruments (e.g. commercial paper) when there is a general market disruption must be
secured by the underlying assets, and must rank at least pari passu with the claims of
holders of the capital market instruments.
 
Treatment of overlapping exposures
 
581. A bank may provide several types of facilities that can be drawn under various
conditions. The same bank may be providing two or more of these facilities. Given the
different triggers found in these facilities, it may be the case that a bank provides duplicative
coverage to the underlying exposures. In other words, the facilities provided by a bank may
overlap since a draw on one facility may preclude (in part) a draw under the other facility. In
the case of overlapping facilities provided by the same bank, the bank does not need to hold
additional capital for the overlap.
 
Rather, it is only required to hold capital once for the position covered by the overlapping facilities (whether they are liquidity facilities or credit enhancements). Where the overlapping facilities are subject to different conversion factors, the bank must attribute the overlapping part to the facility with the highest conversion factor. However, if overlapping facilities are provided by different banks, each bank must hold capital for the maximum amount of the facility.
 
Eligible servicer cash advance facilities
 
582. Subject to national discretion, if contractually provided for, servicers may advance
cash to ensure an uninterrupted flow of payments to investors so long as the servicer is
entitled to full reimbursement and this right is senior to other claims on cash flows from the
underlying pool of exposures. At national discretion, such undrawn servicer cash advances
or facilities that are unconditionally cancellable without prior notice may be eligible for a 0%
CCF.
 
(v) Treatment of credit risk mitigation for securitisation exposures
 
583. The treatment below applies to a bank that has obtained a credit risk mitigant on a
securitisation exposure. Credit risk mitigants include guarantees, credit derivatives, collateral and on-balance sheet netting. Collateral in this context refers to that used to hedge the credit risk of a securitisation exposure rather than the underlying exposures of the securitisation transaction.
 
584. When a bank other than the originator provides credit protection to a securitisation
exposure, it must calculate a capital requirement on the covered exposure as if it were an
investor in that securitisation. If a bank provides protection to an unrated credit
enhancement, it must treat the credit protection provided as if it were directly holding the
unrated credit enhancement.
 
Collateral
 
585. Eligible collateral is limited to that recognised under the standardised approach for
CRM (paragraphs 145 and 146). Collateral pledged by SPEs may be recognised.
Guarantees and credit derivatives
 
586. Credit protection provided by the entities listed in paragraph 195 may be recognised.
SPEs cannot be recognised as eligible guarantors.
 
587. Where guarantees or credit derivatives fulfil the minimum operational conditions as
specified in paragraphs 189 to 194, banks can take account of such credit protection in
calculating capital requirements for securitisation exposures.
 
588. Capital requirements for the guaranteed/protected portion will be calculated
according to CRM for the standardised approach as specified in paragraphs 196 to 201.
 
Maturity mismatches
 
589. For the purpose of setting regulatory capital against a maturity mismatch, the capital
requirement will be determined in accordance with paragraphs 202 to 205. When the
exposures being hedged have different maturities, the longest maturity must be used.
 
(vi) Capital requirement for early amortisation provisions
 
Scope
 
590. As described below, an originating bank is required to hold capital against all or a
portion of the investors’ interest (i.e. against both the drawn and undrawn balances related to
the securitised exposures) when:
 
(a) It sells exposures into a structure that contains an early amortisation feature; and
 
(b) The exposures sold are of a revolving nature. These involve exposures where the
borrower is permitted to vary the drawn amount and repayments within an agreed
limit under a line of credit (e.g. credit card receivables and corporate loan
commitments).
 
591. The capital requirement should reflect the type of mechanism through which an
early amortisation is triggered.
 
592. For securitisation structures wherein the underlying pool comprises revolving and
term exposures, a bank must apply the relevant early amortisation treatment (outlined below
in paragraphs 594 to 605) to that portion of the underlying pool containing revolving
exposures.
 
593. Banks are not required to calculate a capital requirement for early amortisations in
the following situations:
 
(a) Replenishment structures where the underlying exposures do not revolve and the
early amortisation ends the ability of the bank to add new exposures;
 
(b) Transactions of revolving assets containing early amortisation features that mimic
term structures (i.e. where the risk on the underlying facilities does not return to the
originating bank);
 
(c) Structures where a bank securitises one or more credit line(s) and where investors
remain fully exposed to future draws by borrowers even after an early amortisation
event has occurred;
 
(d) The early amortisation clause is solely triggered by events not related to the
performance of the securitised assets or the selling bank, such as material changes
in tax laws or regulations.
 
Maximum capital requirement
 
594. For a bank subject to the early amortisation treatment, the total capital charge for all
of its positions will be subject to a maximum capital requirement (i.e. a ‘cap’) equal to the
greater of (i) that required for retained securitisation exposures, or (ii) the capital requirement that would apply had the exposures not been securitised. In addition, banks must deduct the entire amount of any gain-on-sale and credit enhancing I/Os arising from the securitisation transaction in accordance with paragraphs 561 to 563.
 
Mechanics
 
595. The originator’s capital charge for the investors’ interest is determined as the
product of (a) the investors’ interest, (b) the appropriate CCF (as discussed below), and (c)
the risk weight appropriate to the underlying exposure type, as if the exposures had not been
securitised. As described below, the CCFs depend upon whether the early amortisation
repays investors through a controlled or non-controlled mechanism. They also differ
according to whether the securitised exposures are uncommitted retail credit lines (e.g. credit card receivables) or other credit lines (e.g. revolving corporate facilities). A line is considered uncommitted if it is unconditionally cancellable without prior notice.
 
(vii) Determination of CCFs for controlled early amortisation features
 
596. An early amortisation feature is considered controlled when the definition as
specified in paragraph 548 is satisfied.
 
Uncommitted retail exposures
 
597. For uncommitted retail credit lines (e.g. credit card receivables) in securitisations
containing controlled early amortisation features, banks must compare the three-month
average excess spread defined in paragraph 550 to the point at which the bank is required to
trap excess spread as economically required by the structure (i.e. excess spread trapping
point).
 
598. In cases where such a transaction does not require excess spread to be trapped,
the trapping point is deemed to be 4.5 percentage points.
 
599. The bank must divide the excess spread level by the transaction’s excess spread
trapping point to determine the appropriate segments and apply the corresponding
conversion factors, as outlined in the following table.
 
 
600. Banks are required to apply the conversion factors set out above for controlled
mechanisms to the investors’ interest referred to in paragraph 595.
Other exposures
 
601. All other securitised revolving exposures (i.e. those that are committed and all nonretail
exposures) with controlled early amortisation features will be subject to a CCF of 90%
against the off-balance sheet exposures.
 
(viii) Determination of CCFs for non-controlled early amortisation features
 
602. Early amortisation features that do not satisfy the definition of a controlled early
amortisation as specified in paragraph 548 will be considered non-controlled and treated as
follows.
 
Uncommitted retail exposures
 
603. For uncommitted retail credit lines (e.g. credit card receivables) in securitisations
containing non-controlled early amortisation features, banks must make the comparison
described in paragraphs 597 and 598:
 
604. The bank must divide the excess spread level by the transaction’s excess spread
trapping point to determine the appropriate segments and apply the corresponding
conversion factors, as outlined in the following table.
 
 
Other exposures
 
605. All other securitised revolving exposures (i.e. those that are committed and all nonretail
exposures) with non-controlled early amortisation features will be subject to a CCF of
100% against the off-balance sheet exposures.
    
 

 

 

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