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    BCBS Proposes to Amend Capital Treatment of Securitizations of NPLs

    June 23, 2020

    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.

     

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    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

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