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
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.