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.
Effective Date: January 01, 2023
Keywords: International, Banking, Credit Risk, Securitization Framework, Regulatory Capital, Basel, NPLs, SEC-IRBA, Standardized Approach, IRB Approach, BCBS
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