Revisions to the securitisation framework

December 2014

The Basel Committee on Banking Supervision's revisions to the securitisation framework aim to address a number of shortcomings in the Basel II securitisation framework and to strengthen the capital standards for securitisation exposures held in the banking book.

This framework, which will come into effect in January 2018, forms part of the Committee's broader Basel III agenda to reform regulatory standards for banks in response to the global financial crisis and thus contributes to a more resilient banking sector.

The crisis highlighted several weaknesses in the Basel II securitisation framework, including mechanistic reliance on external ratings, lack of risk sensitivity, cliff effects and insufficient capital for certain exposures. The Committee has revised the securitisation framework to address these issues.

The most significant revisions with respect to the Basel II securitisation framework relate to changes in (i) the hierarchy of approaches; (ii) the risk drivers used in each approach; and (iii) the amount of regulatory capital banks must hold for exposures to securitisations (ie the framework's calibration).

The revised hierarchy of approaches reduces reliance on external ratings. It also simplifies and limits the number of approaches. At the top of this hierarchy is the Internal Ratings-Based Approach, which banks may use if their supervisors have approved their use of internal models. This is followed by the External Ratings-Based Approach - where credit ratings are permitted to be used in the jurisdiction - and the Standardised Approach. Additional risk drivers, notably an explicit adjustment to take account of the maturity of a securitisation's tranche, have been introduced in order to address weaknesses in the Basel II framework, which resulted in under-capitalisation of certain exposures.

The final requirements have incorporated feedback from two rounds of consultation (in December 2012 and December 2013) as well as two quantitative impact studies that helped inform the policy deliberations.