BCBS Amends Capital Treatment of Non-Performing Loan Securitizations
BCBS published a technical amendment to the capital treatment of securitizations of non-performing loans by banks. In contrast to the proposal on the capital treatment of non-performing loan securitizations, which was published in June 2020, the final rule permits banks to apply the external ratings-based approach to non-performing loan securitization exposures, without the 100% risk-weight floor. In addition, the final rule includes discounts on tranche sales in the definition of discount incurred by the originating bank that factors in the capital requirements. With this, BCBS is amending the securitization standard to address a gap in the existing regulatory framework by setting out prudent and risk-sensitive capital requirements for non-performing loan securitizations. The technical amendment is to be implemented by, no later than, January 01, 2023.
BCBS had started developing the technical amendment before the onset of the COVID-19 pandemic. However, the recent observations in which the securitized portfolio consists mostly of non-performing loans have shed light on the potential risk-weight miscalibration. To correct this situation, BCBS has agreed to add the following elements to the securitization:
- An explicit definition of securitizations of non-performing loans
- Removal of the option to use foundation internal risk-based parameters as inputs for the internal ratings-based approach (SEC-IRBA) for all securitizations of NPLs
- Introduction of a 100% risk-weight floor for exposures to securitizations of non-performing loans that are risk-weighted under the SEC-IRBA or the standardized approach (SEC-SA).
- Risk-weight of 100% under SEC-IRBA or SEC-SA, for the senior tranches of securitizations of non-performing loans where the non-refundable purchase price discount is equal to, or greater than, 50% of the securitized portfolio
All other provisions of the current securitization standard, including the use of external ratings-based approach (SEC-ERBA) and the possibility of capping the capital requirement for exposures from the same transaction, will also apply to the securitizations of non-performing loans. This technical amendment does not change any rule related to the securitization of performing loans.
Related Links
Effective Date: January 01, 2023
Keywords: International, Banking, Credit Risk, Securitization Framework, Regulatory Capital, Basel, NPLs, SEC-IRBA, Standardized Approach, IRB Approach, 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
Previous Article
EBA Proposes to Revise Guidelines on Sound Remuneration PoliciesRelated Articles
OSFI Finalizes on Climate Risk Guideline, Issues Other Updates
The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.
BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending
BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.
HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.
BCBS Report Examines Impact of Basel III Framework for Banks
The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.
PRA Consults on Prudential Rules for "Simpler-Regime" Firms
Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.
DNB Publishes Multiple Reporting Updates for Banks
DNB, the central bank of Netherlands, updated the list of additional reporting requests and published additional data quality checks and XBRL-Formula linkbase documents for the first quarter of 2023.
NBB Sets Out Climate Risk Expectations, Issues Reporting Updates
The National Bank of Belgium (NBB) published a communication on climate-related and environmental risks, issued an update on XBRL reporting
EBA Updates Address Securitization Standards and DGS Guidelines
The European Banking Authority (EBA) published the final draft of the regulatory technical standards that set out conditions for assessment of homogeneity of the underlying exposures in simple, transparent, and standardized (STS) securitizations.
FSB Publishes Letter to G20, Sets Out Work Priorities for 2023
The Financial Stability Board (FSB) published a letter intended for the G20 Finance Ministers and Central Bank Governors, highlighting the work that FSB will take forward under the Indian G20 Presidency in 2023
ISSB Standards May Become Effective from January 2024
The International Organization of Securities Commissions (IOSCO) welcomed the confirmation statement by the International Sustainability Standards Board (ISSB) setting out its progress in the development of its first sustainability-related corporate disclosure standards.
