Basel II and Securitisation: A Guided Tour through a New Landscape 
Structured Finance
Global Special Report
Basel II and Securitisation
A Guided Tour through a New Landscape
Overview
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
Global Special Report
Basel II and Securitisation
A Guided Tour through a New Landscape
Overview
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