BCBS Proposes to Amend Capital Treatment of Securitizations of NPLs
BCBS is proposing on a technical amendment to the securitization standard to address a gap in the existing regulatory framework. The proposal sets out a prudent treatment for securitizations of non-performing loans (NPLs), with a risk-weight of 100% for certain senior tranches of non-performing loan securitizations. The risk-weight applicable to the other positions are determined by the existing hierarchy of approaches, in conjunction with a 100% risk-weight floor and a ban on the use of certain inputs for capital requirements. Comment period for this consultation ends on August 23, 2020 while the proposed amendment to the securitization standard is expected to come into effect by no later than January 01, 2023.
BCBS started developing this proposal before the onset of the COVID-19 pandemic. The proposed technical amendment to the securitization standard implements the following modifications, without changing any of the existing rules for securitizations of performing assets:
- Establishment of a standardized definition of NPL securitizations as securitization transactions where there is a percentage of at least 90% of defaulted assets in the portfolio at inception and at a later time where assets are added to or removed from the underlying pool due to replenishment, restructuring or any other relevant reason. Re-securitizations have been expressly excluded from this definition of NPL securitizations. The definition above is a minimum standard, and national supervisors should be able to implement stricter criteria.
- A ban on the use of foundation internal ratings-based (IRB) parameters as inputs for the SEC-IRBA for all NPL securitizations.
- Introduction of a risk-weight floor of 100% for all NPL securitization exposures.
- Introduction of a fixed 100% risk-weight applicable to the most senior tranche of qualifying NPL securitizations, where “qualifying” refers to traditional securitizations in which the nonrefundable purchase price discount (NRPPD), which is essentially the discount applied to the nominal or outstanding value of the NPL portfolio when these defaulted assets are securitized, is equal to or larger than 50% of the outstanding amount of the NPLs.
In conjunction with the foundation IRB parameters ban and the 100% risk-weight floor, the current provisions of the securitization framework continue to apply to all other exposures to NPL securitizations (that is, senior tranches of non-qualifying NPL securitizations and mezzanine and junior tranches of all NPL securitizations). The banks that are allowed, under the current rules, to apply a maximum capital requirement for their securitization exposures in the same transaction can continue to apply the same maximum capital requirement as applicable under current rules. This applies to originator and sponsor banks as well as investor banks using the SEC-IRBA.
Related Links
Comment Due Date: August 23, 2020
Effective Date: January 01, 2023 (proposed)
Keywords: International, Banking, Credit Risk, Securitization Framework, Regulatory Capital, Basel, SEC-IRBA, BCBS
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Related Articles
EBA Publishes Final Regulatory Standards on STS Securitizations
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying and, where relevant, calibrating the minimum performance-related triggers for simple.
ECB Further Reviews Costs and Benefits Associated with IReF
The European Central Bank (ECB) is undertaking the integrated reporting framework (IReF) project to integrate statistical requirements for banks into a standardized reporting framework that would be applicable across the euro area and adopted by authorities in other EU member states.
EBA Publishes Funding Plans Report, Receives EMAS Certification
The European Banking Authority (EBA) has been awarded the top European Standard for its environmental performance under the European Eco-Management and Audit Scheme (EMAS).
MAS Launches SaaS Solution to Simplify Listed Entity ESG Disclosures
The Monetary Authority of Singapore (MAS) set out the Financial Services Industry Transformation Map 2025 and, in collaboration with the SGX Group, launched ESGenome.
BCBS to Finalize Crypto Rules by End-2022; US to Propose Basel 3 Rules
The Basel Committee on Banking Supervision met, shortly after a gathering of the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS.
IOSCO Welcomes Work on Sustainability-Related Corporate Reporting
The International Organization of Securities Commissions (IOSCO) welcomed the work of the international audit and assurance standard setters—the International Auditing and Assurance Standards Board (IAASB)
BoE Allows One-Day Delay in Statistical Data Submissions by Banks
The Bank of England (BoE) published a Statistical Notice (2022/18), which informs that due to the Bank Holiday granted for Her Majesty Queen Elizabeth II’s State Funeral on Monday September 19, 2022.
ACPR Amends Reporting Module Timelines Under EBA Framework 3.2
The French Prudential Control and Resolution Authority (ACPR) announced that the European Banking Authority (EBA) has updated its filing rules and the implementation dates for certain modules of the EBA reporting framework 3.2.
ECB Paper Discusses Disclosure of Climate Risks by Credit Agencies
The European Central Bank (ECB) published a paper that examines how credit rating agencies accepted by the Eurosystem, as part of the Eurosystem Credit Assessment Framework (ECAF)
APRA to Modernize Prudential Architecture, Reduces Liquidity Facility
The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility (CLF) for authorized deposit-taking entities to ~USD 33 billion on September 01, 2022.
