Securitisation Framework

Transcription

1 Securitisation Framework Recent regulatory changes and market trend Zeshan Choudhry June 2011

2 Contents 1 Introduction and Background 2 Overview of Common Practice 3 Review of Securitisation Framework under Basel II 4 Changes to the Basel II Framework 5 Market Trend: Mortgage Loan Origination 6 Questions

3 2. Introduction and Background Background Securitisation originated in the sale of residential mortgage backed securities in the US in the 1970s and accounts for the largest share of deals in the US and Europe Market had expanded both in the range of financial assets that are now securitised and globally with the increasing number of countries where firms are securitising assets. Prior to the financial crisis the US experienced the fastest growth in the ABS market. The US dominates covering over 80% of securitisation market worldwide European market had been stimulated by the implementation of Basel II and the reduced capital charge associated with less risky loans. The number of defaults that occurred during/post financial crisis remain less that 0.5% for European securitised deals compared to over 10% in the US. Regulatory Environment The recent financial turmoil highlighted unexpected risks associated with securitisations. The need to improve the understanding, assessment and management of securitisation risk has therefore been a key area of focus for banking regulators. Revisions to the Basel II market risk framework (July 2009). Enhancements to the Basel II framework (Jul 2009) (collectively referred to as Basel 2.5). A global regulatory framework for more resilient banks and banking systems (Dec 2010) (Basel III). The regulatory changes focus on the governance associated with deals, the correct identification of risks and ensuring high transparency and reporting of deals.

4 2. Overview of Common Practice

5 2. Overview of Common Practice Securitisation is another means of creating the relationship between those who are want to take on the risk (at the right return) and those who want to reduce risks. It provides banks with alternative strategies to diversify investment and risk portfolio s Seller/Originator: A financial institution (normally a bank) originates underlying exposures included in the securitisation; or serves as a sponsor of an asset backed commercial paper (ABCP) conduit or similar programme. Asset pools: A variety of assets or future income streams may be used securitised, residential and commercial mortgage loans, corporate loans, government loans and credit derivatives. SPV: Also referred to as a "bankruptcy-remote entity" whose operations are limited to the acquisition and financing of specific assets. The SPV is usually a subsidiary company with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt. A credit-enhancing interest-only strip (I/O) is an on-balance sheet asset that (i) represents a valuation of cash flows related to future margin income, and (ii) is subordinated. A reserve or spread account, in which funds remaining after expenses such as principal and interest payments, charge-offs and other fees have been paid-off are accumulated, and can be used when SPE expenses are greater than its income. Third-party insurance, or guarantees of principal and interest payments on the securities. Investor: An investing bank, other than the originator and the sponsor, that assumes the economic risk of a securitisation exposure.

6 3. Review of Securitisation Framework under Basel II

7 3. Review of Securitisation Framework under Basel II Overview of Basel II Approach Operational Requirements Significant transfer of risk must be recognised in order to receive benefit from reduction in risk weight. The transfer of credit risk to third parties should only be considered significant if the proportion of risk transferred is broadly commensurate with, or exceeds, the proportion by which risk weighted exposure amounts are reduced An originator which, in respect of a securitisation, or a sponsor, must not, with a view to reducing potential or actual losses to investors, provide support to the securitisation beyond its contractual obligations If an originator or sponsor fails to comply with the above in respect of a securitisation, it must: 1. hold capital against all of the securitised exposures associated with the securitisation transaction as if they had not been securitised; and 2. disclose publicly: that it has provided non-contractual support; and the regulatory capital impact of doing so.

8 3. Review of Securitisation Framework under Basel II Securitisation Exposure Standardised IRB-Originator IRB-Investor Rated Investment Grade Originating Banks: Max: RW of underlying Other Banks: AAA to AA- 20% A+ to A- 50% All Positions: RBA Maximum Capital Requirement: None All Positions: RBA Maximum Capital Requirement: None BBB+ to BBB- 100% Rated Non- Investment Grade Originating Banks: Max: RW of underlying Other Banks: BB+ to BB- 350% B+ to unrated: Deduct All Positions: RBA Maximum Capital Requirement: None All Positions: RBA Maximum Capital Requirement: None Unrated All banks: Deduct all positions Liquidity facilities extended to ABCP programmes: IAA (meet necessary requirements) Other exposures: SF (for RW up to 1,250%) Other exposures: SF (for RW up to 1,250%, subject to FSA approval) Deduction: Deduction: RW greater than 1,250% and all other unrated exposures RW greater than 1,250% and all other unrated exposures

9 4. Changes to the Basel II Framework

10 4. Changes to the Basel II Framework CHANGES IMPACTS Extension of capital charge to securitization exposures in Trading Book (Revision to Basel II Market Risk Framework) Higher Credit Conversion Factor (CCF) for eligible liquidity facilities (LFs) in SA approach (Enhancement to the Basel II Framework) 1250% risk weight applies to certain Securitization exposures (rather than deduction) (Basel III) 5% retention clause (minimum net economic risk retention) (CRD 2) Higher risk weights are applied to resecuritisation exposures in banking book (Enhancement to the Basel II Framework) More conservative calculations applied to securitization exposures in Banking book Higher capital charges for resecuritisation exposures in trading book Tougher capital requirement for re-securitization exposures The direct impact will be a deterioration in key financial ratios, such as the Tier 1 Capital Ratio, Common equity Ratio and the Total Capital Ratios (Tier 1 & 2) Increased transparency in credit assessment and more publicly available information Revised haircut on securitization exposures as financial collateral Re-securitization no longer qualifies as financial collateral Reduced capital benefits of saucerisation (Basel III) (Basel III) (Basel III) 9

11 4. Changes to the Basel II Framework Risk calculation securitization exposures in the trading book Treatment of securitization exposures in the trading book will now need to be aligned to treatments in the banking book (equivalent treatment) The risk weight is to be applied to the net positions of the securitization instrument in the trading book. The proposed capital charges are higher than those for similarly rated government and corporate securities. Specific risk capital charges under the standardised approach (SA) based on external credit ratings External Credit Assessment AAA to AA- A-1/P-1 A+ to A- A-2/P-2 BBB+ to BBB- A-3/P-3 BB+ to BB- Below BB- and Below A- 3/P-3 or unrated Securitization 1.6% 4% 8% 28% Deduction Re-securitization 3.2% 8% 18% 52% Deduction Sources: BIS Documents (Basel Committee on Banking Supervision, Revisions to the Basel II market risk framework, July 2009) Exception of this treatment applied for certain correlation trading positions, subject to regulatory approval and the imposition of a capital floor Higher Capital Charge Less benefit for banks to hold securitization exposures in the Trading Book

12 4. Changes to the Basel II Framework Risk calculation standardised approach New risk weights which are based on ratings from the credit rating agencies External Credit Assessment AAA to AA-A- 1/P-1 A+ to A- A-2/P-2 BBB+ to BBB- A-3/P-3 BB+ to BB- Below BB- and Below A-3/P-3 or unrated Old Risk Weighting All securitizations 20% 50% 100% 350% Deduction New Risk Weighting Securitization 20% 50% 100% 350% Deduction Re-securitization 40% 100% 225% 650% Deduction Sources: BIS Documents (Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital Standards A Revised Framework, June 2006) BIS Documents (Basel Committee on Banking Supervision, Enhancements to the Basel II framework, July 2009) Credit Conversion Factors(CCF) for short-term eligible liquidity facilities will be increased from 20% to 50% (Short-term - original maturity of one year or less) Higher Capital Charge No benefit for short-term eligible liquidity facilities

13 4. Changes to the Basel II Framework Risk calculation Internal Rating Based approach Re-securitization exposures will have a different treatment to securitization exposures, taking into account the inherently higher risk The Rating-Based Approach risk weight tables (below) were modified with two additional columns specifically for re-securitization exposures Sources: BIS Documents (Basel Committee on Banking Supervision, Enhancements to the Basel II framework - July 2009; Basel III: A global regulatory framework for more resilient banks and banking systems - December 2010) Capital charge for re-securitization exposures can potentially be doubled

14 4. Changes to the Basel II Framework Capital Requirement Certain securitization exposures will no longer be eligible for capital deduction (50% from Tier 1 capital and 50% from Tier 2 capital)*. Instead, a 1250% risk weight will be applied. An example of Tier 1 Capital Ratio calculation below (for illustration purposes only): Ratios under Basel II and Basel III (Hypothetical) Tier 1 capital (before deducting securitization exposure) Basel II Certain securitization exposure Basel III Deducted securitization exposure 50% x 100 = 50 0 Risk-weighted assets 10,000 10, x1250%= 11,250 Tier 1 capital/risk-weighted assets ( )/ 10,000=8.5% 900 / 11,250 = 8.0% Lower Tier 1 Capital Ratio as well as other common capital ratios *100% from Tier1 Capital if it is the increase in equity resulted from a securitization transaction, such as expected future margin income (FMI) resulting in a gain-on-sale)

15 4. Changes to the Basel II Framework External Credit Assessment More transparency is required with external credit assessments, applied in the standardised and IRB approach The following information will be made publicly available, non-selective and free of charge: Credit assessment procedures Methodologies and Assumptions Key elements underlining the assessments Loss and cash-flow analysis Sensibility of ratings to changes in the underlying ratings assumptions In addition, some specific Transparency/ Disclosure requirements have also been added, for ECAIs (External Credit Assessment Institutions) Code of Conduct General nature of the compensation arrangement with assessed entities Assessment methodologies, including the definition of default, the time horizon, and the meaning of each rating Actual default rates experienced in each assessment category; and the transitions of the assessments, e.g. the likelihood of AA ratings becoming A over time. Potential adverse impact on the value of securitization instruments Higher cost associated with securitization

16 5. Market Trend: Mortgage Loan Origination

17 5. Market trend : Mortgage Loan Origination Market Observation Mortgage loan origination volume stays low but signs of recovered are seen Banks are primarily focusing on prime assets in its local jurisdiction Securitisation volume remains low, i.e. traditional balance sheet lending are still the majority in the market Regulatory Impact Treatment on securitisation exposure in trading book will be the same as in the banking book Higher capital requirement on securitisation exposure proposed in Basel III will have adversely impact on mortgage lending Higher capital cost to hold securitisation exposures Signs of reform Increasing number of covered bond issuance proved the demand of securitisation assets, however, rating and regulatory uncertainty are the key concerns for investors Better transparency in new securitisation deals will give regulators, rating agencies and investors better comfort and a way of going forward

18 Questions