Global Special Report
Basel II and Securitisation
A Guided Tour through a New Landscape
With Basel II now being rolled out globally, there is increasing interest among both originators and investors in how this new capital regime affects structured finance. Given that bank capital considerations have historically influenced origination, structuring and investment decisions, understanding the mechanics of Basel II and its impact on capital requirements is important to understanding the future scope and shape of securitisation activity. More immediately, recent ratings volatility within some sectors of structured finance has sparked renewed interest in this topic among originators, investors and regulators. This report provides both (1) a review of the various Basel II approaches for calculating capital charges on securitisation exposures; and (2) analysis of the potential capital dynamics for a sample of securitisation transactions. The capital analysis covers residential mortgage‐backed securities (RMBS), commercial mortgage‐backed securities (CMBS); credit card asset‐backed securities (ABS); and collateralised debt obligations (CDO) of corporate assets. The Basel II capital charges on the underlying pool of collateral assets is analysed relative to the total charges on the securitisation of these same assets, a methodology first used in Fitch’s 2005 report, “Basel II: Bottom‐Line Impact on Securitisation Markets”. There are several findings of note from this study. · A primary goal of Basel II is to neutralise regulatory capital arbitrage, such that a bank’s decision to securitise a given pool of assets is based on economic rather than regulatory motivations. By aligning capital charges more closely with economic risk, Basel II aims to mitigate the Basel I arbitrage of securitising high quality assets and retaining subordinate tranches. Basel II’s impact on securitisation capital charges ultimately depend on a complex interplay of factors, including choice of Basel II capital calculation approach; capital charges on alternative forms of similar risk exposure; deal structure and conventions; type and credit quality of assets being securitised; credit ratings methodologies and surveillance processes; regulatory implementations and policy interpretations; and market conditions and investor risk appetite. Case‐by‐case analysis is thus critical. Basel II’s capital dynamics could vary across structured finance asset classes. Based on the sample transactions tested in this study, Basel II appears to result in relatively close alignment between the unsecuritised and securitised charges for RMBS and corporate CDOs, but with unsecuritised charges exceeding the securitisation charges for the CMBS and credit card ABS examples. For the transactions studied, the supervisory formula generates pronounced cliffs and limited differentiation in charges across the capital structure, potentially reducing its risk sensitivity. Coupled with its technical complexity, use of the supervisory formula could prove impractical in many instances. Basel II’s risk sensitivity drives capital dynamics. Relatively subtle changes in the risk attributes of either the collateral pool or the capital structure can significantly affect capital requirements. For example, in the case of the CMBS transaction tested, a mild change in assumptions would result in perfect alignment between the unsecuritised and securitised Basel II charges. Securitisation charges under the new regulatory capital framework accelerate rapidly when crossing the threshold from investment to non‐investment grade.
Martin Hansen +1 212 908 9190 email@example.com Krishnan Ramadurai +44 20 7417 3480 firstname.lastname@example.org Ian Linnell +44 20 7417 3550 email@example.com Gary van Vuuren +44 20 7417 3550 firstname.lastname@example.org Atanasios Mitropoulos +44 20 7417 4317...