Basel proposes total recast of securitisation capital requirements
The Basel Committee for Banking Supervision put up a proposal to recast the capital rules for securitisation transactions. The proposals that seek to completely replace the existing capital requirements for securitisation framework have been put for public comments by 15th March 2013. It is expected that once the comments are taken into consideration, the BCBS may replace the existing capital requirements by the new requirements.
This will be on top of Basel III, the progressive implementation of which starts from this year. It is notable that Basel III made several new proposals on liquidity standards, leverage limits, Tier 1 capital requirements and so on, but did not make significant changes to the capital requirements for securitisation transactions.
The proposed capital computation will be far more complex than the present one. Complexity aside, the revised capital requirements will assign more capital for senior tranches, and less capital than required right now for junior tranches, so that the so-called cliff effect of a rating downgrade could be avoided. The overall spirit is also lesser reliance on ratings.
Vinod Kothari summarises the proposals here.
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[Reported by: Vinod Kothari]