Changes to the securitisation framework

January 2004

As announced in the 15 January 2004 press release from the Basel Committee, this technical paper has been issued.

In response to public comments on the third consultative paper (CP3) of the New Basel Accord, the Basel Committee on Banking Supervision announced in October 2003 plans to revise the internal ratings-based (IRB) approach to securitisation exposures.

At its January 2004 meeting, the Committee specified changes that address industry concerns related to the complexity of the securitisation proposal and the operational burden related to its implementation. Additionally, the Committee focused on industry comments regarding the need for greater internal consistency among the proposals comprising the securitisation framework.

This note provides an overview of the Committee's current thinking on how the securitisation framework for banks that adopt the internal ratings-based (IRB) approach to credit risk will be re-structured. The Committee is simplifying the securitisation framework and promoting greater consistency among the available approaches in the following manner:

• First, the Committee is planning to adopt a treatment for certain low-risk unrated positions that more closely reflects leading banks' current risk management practices. To this end, the Committee is introducing an Internal Assessment Approach (IAA) for banks' exposures to Asset-Backed Commercial Paper (ABCP) conduits, based on methodologies that banks in some jurisdictions currently use for internal purposes.
• Second, the Committee will make available simpler alternatives to the Supervisory Formula (SF) presented in CP3 for the treatment of unrated positions, which some respondents considered to be unnecessarily complex and computationally burdensome.
• Third, the Committee is considering ways to add flexibility to the top-down approach to calculating capital charges on purchased receivables so as to facilitate the calculation of KIRB, where KIRB is the capital charge that would have been applied to the underlying exposures had they not been securitised.
• Fourth, all externally rated positions will be treated under the Ratings-Based Approach (RBA), regardless of whether the bank is an originator or an investor and whether the position falls above or below the "KIRB" threshold.
• Finally, the lowest set of risk weights under the RBA (found in the left-most column of the RBA risk weight tables in CP3) will be applied to "senior" positions rather than to those that are "thick" positions as defined in CP3. Some changes to the risk weights are also proposed.

This note also discusses the implications of calibrating risk weights to unexpected losses (UL) only. It should be noted that the Committee's discussions are still on-going and that the approaches discussed here are thus still subject to review.