Basel IV: Securitisation

In December 2014, the Basel Committee published a framework for calculating capital requirements for securitisation exposures. The aim was to reduce the dependence on external ratings in the previous methods and to strengthen risk sensitivity in order to encourage institutions to improve their risk management. In addition, cliff effects that arise when small changes in input parameters lead to jumps in risk weights were to be eliminated, and the regulatory framework as a whole was to be simplified. According to the Basel Committee, the new regulations should come into force in 2018. In July 2016, criteria for privileging simple, transparent and comparable ("STC") securitisations were added to the new framework, for which a consultation paper was published in July 2017.

The various new Basel rules mainly include revised methods for the capital treatment of securitisation positions as well as requirements for banks' risk management.

For the capital treatment, the application of a uniform approach hierarchy is envisaged in future for both credit risk standard and IRB banks, essentially consisting of three approaches. First is the Internal Ratings-Based Approach (SEC-IRBA), which banks are to apply, subject to existing applicable internal models. This is used if the share of securitised assets in the pool rated under the IRBA is at least 95% and the data required for the SEC IRBA is available.

If the criteria for applying the SEC IRBA are not met, the External Ratings-Based Approach (SEC ERBA) is used. This provides for the use of external ratings to determine capital requirements. If the SEC-ERBA cannot be used either, the standardised approach (SEC-SA) is applied. This approach is also mandatory for re-securitisations. A minimum risk weight of 15% applies to all approaches. If none of the three approaches and also not the IAA can be applied for asset-backed commercial paper positions, for example because the required input parameters are missing, a risk weight of 1250 % applies.

With regard to the risk management of securitisations, the new rules define due diligence requirements in particular, e.g. with regard to external risk assessments, as well as requirements for risk monitoring processes in more detail. The aim is for credit institutions to understand their securitisation positions in detail and to monitor their risks from securitisations on a regular basis. This goes hand in hand with an obligation to collect extensive data, for example on liquidity reserves, default rates or late payments. Increased minimum retentions for originators are also being discussed.

In June 2017, after the conclusion of the trilogue negotiations, two compromise texts for regulations were published at the European level, which, based on the Basel proposals, provide corresponding regulations for both the privileging of so-called STS securitisation (simple, transparent, standardised) and the capital treatment in the CRR. The latter were not integrated into the draft CRR II.

They are to be applied from the beginning of 2019 with a transitional arrangement for legacy securitisations until the end of 2019 and supplemented by EBA standards. The banks will face challenges with regard to the future structuring of securitisations as well as the data budget, but also with regard to data procurement processes and the implementation of the calculation logic. In addition, the banks have to expect an increase in capital requirements, among other things due to the minimum risk weighting, which will only be mitigated by the planned European relief for simple, transparent and standardised transactions ("STS securitisations").

Institutions should prepare themselves promptly for the new regulations through appropriate simulation calculations and gap analyses, which, depending on the portfolio, may entail considerable implementation effort and significantly changed capital requirements.