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
OSFI Outlines Prudential Policy Priorities for Coming Months
OSFI has set out the near-term priorities for federally regulated financial institutions and federally regulated private pension plans for the coming months until March 31, 2022.
BIS Announces TechSprint on Innovative Green Finance Solutions
Under the Italian G20 Presidency, BIS Innovation Hub and the Italian central bank BDI launched the second edition of the G20 TechSprint on the lookout for innovative solutions to resolve operational problems in green and sustainable finance.
EBA Proposed Regulatory Standards for Central Database on AML/CFT
EBA proposed the regulatory technical standards on a central database on anti-money laundering and countering the financing of terrorism (AML/CFT) in EU.
ECB Responds to EC Consultation on Crisis Management Framework
ECB published its response to the targeted EC consultation on the review of the bank crisis management and deposit insurance framework in EU.
ACPR Publishes Version 1.0.0 of RUBA Taxonomy
ACPR published Version 1.0.0 of the RUBA taxonomy, which will come into force from the decree of January 31, 2022.
BCBS, CPMI, and IOSCO to Survey Market Participants on Margin Calls
BCBS, CPMI, and IOSCO (the Committees) are inviting entities that participate in market infrastructures and securities markets through an intermediary as well as non-bank intermediaries to complete voluntary surveys on the use of margin calls.
ECB Amends Decision on TLTRO III
ECB published Decision 2021/752 to amend Decision 2019/1311 on the third series of targeted longer-term refinancing operations or TLTRO III.
Central Bank of Ireland Issues Draft Template for AnaCredit Reporting
The Central Bank of Ireland published Version 2.7 of the draft credit data template and rules for monthly AnaCredit reporting by banks.
OSFI Consults on Revisions to BCAR and Leverage Requirements Returns
OSFI proposed revisions to the Basel Capital Adequacy Reporting (BCAR) and leverage requirements returns for the 2023 reporting, with the comment period ending on July 09, 2021.
EBA Seeks Views on Revisions to Nonperforming Loan Data Templates
EBA published a discussion paper on review of the standardized nonperforming loans (NPL) transaction data templates, along with the proposed revised NPL data templates.
