Basel Committee proposes lower minimum capital requirements for STC securitization

MANILA, Philippines - The Basel Committee on Banking Supervision (BCBS) is proposing to reduce minimum capital requirements for such STC securitizations by reducing the risk weight floor for senior exposures, and by rescaling risk weights for other exposures.

A range for the potential reduction in capital charges is suggested.

The BCBS is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1974. It provides a forum for regular cooperation on banking supervisory matters, and it aspires for convergence toward common approaches and standards.

In a report, the committee said a final decision on calibration will be undertaken in 2016, based on further analysis and assessment of the quantitative impact of the proposals.

Recently, the committee released a consultative document on capital treatment for “simple, transparent and comparable” securitizations.

This proposal builds on the revised capital standards issued by the Committee in Dec. 2014.

The criteria for identifying simple, transparent and comparable securitizations (STC criteria) were published by the Basel Committee and the International Organization of Securities Commissions in July 2015.

The July 2015 STC criteria are designed to mitigate securitization risks, including uncertainty related to asset risk, structural risk, governance and operational risk.

Transactions that comply with these criteria should therefore have lower structural and model risk.

The criteria noted that additional or more detailed criteria, such as those related to the credit risks of the underlying securitized assets, may be necessary based on specific needs and applications.

Given that greater prescriptiveness is required for using the STC criteria in regulatory capital requirements, the committee proposes to supplement the July 2015 STC criteria with additional criteria for the specific purpose of differentiating the capital treatment of STC from that of other securitization transactions.

The additional criteria would, for example, exclude transactions in which the standardized risk weights for the underlying assets exceed certain levels.