Basel IV Revisions to the securitisation framework · framework (BCBS 325) (BCBS 362) SA counter...
Transcript of Basel IV Revisions to the securitisation framework · framework (BCBS 325) (BCBS 362) SA counter...
Basel IVRevisions to the securitisation framework
We give you an overview of the latest Basel proposals.
www.pwc.com/baseliv
Contents
Preface ............................................................................................................... 5Foreword .............................................................................................................. 6Motivation and Context ........................................................................................ 9
Revisions to the securitisation framework ........................................................... 11Objectives and Improvements ............................................................................. 12New Hierarchy of Approaches............................................................................. 13Internal Ratings-Based Approach (SEC-IRBA) .....................................................14External Ratings-Based Approach (SEC-ERBA) ................................................... 15Securitisation Standardised Approach (SEC-SA) ................................................. 16
Simple, Transparent and Comparable (STC) Securitisations ............................... 17Objectives of STC Securitisations ........................................................................ 18Capital Treatment for STC Securitisations ........................................................... 20
Challenges and Impacts ...................................................................................... 21Capital Treatment for STC Securitisations ........................................................... 22
The Solution: PwC’s SECCT ................................................................................ 23
Our Services ....................................................................................................... 25
Basel IV Revisions to the securitisation framework 5
Preface
6 Basel IV Revisions to the securitisation framework
As part of its revisions to the existing Basel III framework the Basel committee of Banking Supervision (BCBS) has issued several publication and intends to completely redesign the famework for the treatment of securitization positions. The new framework mainly consists of new approaches to RWA calculation and the introduction of a new type of “Simple, Transparent and Comparable” securitization positions.
These changes were introduced by the publication of the “Revisions to the securitisation framework (BCBS303)” from December 2014 and the “Criteria for identifying simple, transparent and comparable securitisations (BCBS343)” from July 2015. Other papers targeting a combination of both concepts followed until in July 2016 the final paper “Revisions to the securitisation framework (BCBS374)” was published. While the RWA impact of this new regulatory agenda can be expect-ed to be felt by all banks, regardless of size or business model, the Basel IV securiti-zation framework will also incentivize banks to reassess its securitisation business and address and embed the results into its business model and business strategy.
Basel IV Revisions to the securitisation framework 7
The reasons for this once again major changes to the securitisation framework is derived not predominantly from the financial crises itself but also from experiences with the regulation targeting securitisation implemented in its aftermath. Some of the reasons are in line with those stated for other changes, some are specific to the securitization framework. Overall the BCBS states that it considers it inevitable to contribute to strengthen the capital standards for originators, sponsors and investors into securitisations in the banking book.
The major weaknesses identified within the existing securitisation regime were a mechanistic reliance on external ratings when determining capital requirements, insufficient risk-sensitivity due to the negligence of certain risk drivers and the existence of cliff-effects with pro-cyclical impact. So the goal was to enhance risk sensitivity, recalibrate risks in a more prudent way, improve consistency with the underlying credit risk framework and enhance simplicity. All adjustments made in the final framework, including the criteria for simple, transparent and comparable securitisations can be mapped to these goals.
8 Basel IV Revisions to the securitisation framework
The BCBS has announced that the new securitization framework will enter into force as of the beginning of 2018.
PwC is constantly developing solution sets, tools and supporting material to inform and prepare our clients on the upcoming regulatory changes.
This brochure is designed to provide you with an overview of the individual topics in the context of Basel IV. For further information on single topics, separate documents have been prepared and will be updated regularly.
Kind regards,
Martin NeisenGlobal Basel IV Leader
Agatha PontikiGlobal Basel IV Standardised Approaches Workstream Leader
Basel IV Revisions to the securitisation framework 9
To address weaknesses such as mechanistic reliance on external ratings, lack of risk sensitivity, cliff effects and insufficient capital for certain exposures, the BCBS finalised the securitisation framework in July 2016, which will come into effect in January 2018.
The Committee also incorporated the criteria for “Simple, Transparent and Comparable” (STC) securitisations and their capital treatment into the revised framework. Compliance with the expanded set of STC criteria provides additional confidence in the performance of the transactions and a reduction in the capital charges for such securitisations is suggested.
Motivation and Context
10 Basel IV Revisions to the securitisation framework
Capital require-ments
Other topics
Interest rate riskCVA riskOperational
riskMarket
risk
Counterparty
credit risk
SecuritisationCredit risk
Capital floors
(BCBS 306)
Minimum capital require
ments for market risk
(BCBS 305)(BCBS 352)
SA (BCBS 307)(BCBS 347)
IRBA(BCBS 362)
Standardised Measure
ment Approach for operational
risk
(BCBS 291)(BCBS 355)
Revisions to the securitisation
framework
(BCBS 303)
Review of the CVA
risk framework
(BCBS 325)(BCBS 362)
SA counter party credit
risk
(BCBS 279)
Interest rate risk in
the banking book
(BCBS 319)(BCBS 368)
Large exposures
(BCBS 283)
Disclosure(BCBS 309)
Stepin risk(BCBS 349)
Fig. 1 Areas of revision by the BCBS
Basel IV Revisions to the securitisation framework 11
Revisions to the securitisation framework
12 Basel IV Revisions to the securitisation framework
Objectives and Improvements
Revisions to the securitisation framework Challenges and Impacts The Solution: PwC’s SECCTSimple, Transparent and
Comparable (STC) Securitisations
Fig. 2 Overview of Objectives and Improvements
Objectives Improvements
• Implementation of three new approaches (SECIRBA, SECERBA, SECSA)
• Revised hierarchy of the proposed approaches• A new capital framework for „Simple,
Transparent, Comparable (STC)“ – securitisations
• Introduction of a 15% riskweight floor for securitisations, 10% for STC securitisations and 100% for resecuritisations
• Consideration of further risk drivers such as tranche maturity and thickness
• For resecuritisations the only approach applicable is the revised standard approach
• No explicit consideration of granularity when using external ratings
Reduce mechanistic reliance on external ratings1Enhanced risk sensitivity2Reduction of existing cliff effects3Increase risk weight for highlyrated sec. exposure4Reduce risk weights for low rated senior sec. exposure5
Basel IV Revisions to the securitisation framework 13
New Hierarchy of Approaches
Fig. 3 Overview: Hierarchy of Approaches
SECInternal Ratings Based Approach (SECIRBA)
SECExternal Ratings Based Approach (SECERBA)
SECStandardised Approach (SECSA)
RW 1250%
14 Basel IV Revisions to the securitisation framework
Internal Ratings-Based Approach (SEC-IRBA)
Revisions to the securitisation framework Challenges and Impacts The Solution: PwC’s SECCTSimple, Transparent and
Comparable (STC) Securitisations
Fig. 4 SEC-IRBA: Key Points
SECInternal Ratings Based Approach (SECIRBA)
• Implementation of the Simplified Supervisory Formula Approach (SSFA)• A key input factor is the IRB capital charge of the underlying pool (KIRB) • Consideration of tranche maturity (MT) and thickness (T=D-A)• Introduction of the supervisory parameter (p)• Input parameter should be available for at least 95% of the securitised exposures
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Internal Ratings-Based Approach (SEC-IRBA)
Basel IV - Revisions to the securitisation framework
SEC-Internal Ratings Based Approach (SEC-IRBA)
• Implementation of the Simplified Supervisory Formula Approach (SSFA)
• A key input factor is the IRB capital charge of the underlying pool (KIRB)
• Consideration of tranche maturity (MT) and thickness (T = D - A)
• Introduction of the supervisory parameter (p)
• Application: Input parameter must be available for at least 95% of the securitized exposures
RW = KSSFA(KIRB) ∙ 12,5
𝑅𝑅𝑅𝑅 = 𝐾𝐾𝐼𝐼𝐼𝐼𝐼𝐼 − 𝐴𝐴𝐷𝐷 − 𝐴𝐴 ∙ 12,5 + 𝐷𝐷 − 𝐾𝐾𝐼𝐼𝐼𝐼𝐼𝐼
𝐷𝐷 − 𝐴𝐴 ∙ 12,5 ∙ 𝐾𝐾𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆(𝐾𝐾𝐼𝐼𝐼𝐼𝐼𝐼)
a = −(1/(p ∙ KIRB))l = max(𝐴𝐴 − KIRB; 0)
KIRB ≤ A < KIRB < D ≤ KIRB
RW = 1,250 %
u = 𝐷𝐷 − KIRB
𝐾𝐾𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆(𝐾𝐾𝐼𝐼𝐼𝐼𝐼𝐼) = (e𝑎𝑎∙𝑢𝑢 − 𝑒𝑒𝑎𝑎∙𝑙𝑙)/𝑎𝑎(𝑢𝑢 − 𝑙𝑙)𝑝𝑝 = max[0,3; (A + B ∙ 1/𝑁𝑁 + C ∙ 𝐾𝐾𝐼𝐼𝐼𝐼𝐼𝐼 + D ∙ 𝐿𝐿𝐿𝐿𝐷𝐷 + E ∙ 𝑀𝑀𝑇𝑇) ∗ x]
A, B, C, D, E: Technical Parameters for calibration of p(dependent on granularity of portfolio)𝑥𝑥 = 1 𝑓𝑓𝑓𝑓𝑓𝑓 𝑛𝑛𝑓𝑓𝑛𝑛 − 𝑆𝑆𝑆𝑆𝑆𝑆 𝑠𝑠𝑒𝑒𝑠𝑠𝑢𝑢𝑓𝑓𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑎𝑎𝑠𝑠𝑠𝑠𝑓𝑓𝑛𝑛𝑠𝑠𝑥𝑥 = 0.5 𝑓𝑓𝑓𝑓𝑓𝑓 𝑆𝑆𝑆𝑆𝑆𝑆 𝑠𝑠𝑒𝑒𝑠𝑠𝑢𝑢𝑓𝑓𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑎𝑎𝑠𝑠𝑠𝑠𝑓𝑓𝑛𝑛𝑠𝑠
Basel IV Revisions to the securitisation framework 15
External Ratings-Based Approach (SEC-ERBA)
Fig. 5 SEC-ERBA: Key Points
SECExternal Ratings Based Approach
• As long as external ratings are permitted in the respective jurisdiction• Consideration of tranche maturity (MT), seniority and thickness (T)• Granularity is not considered explicitly any more, since external ratings already reflect it• Risk weights are determined based on a lookup table• Separate mapping tables for shortterm and longterm positions
15
External Ratings-Based Approach (SEC-ERBA)
Basel IV - Revisions to the securitisation framework
SEC-External Ratings Based Approach (SEC-ERBA)
• As long as external ratings are permitted in the respective jurisdiction
• Consideration of tranche maturity (MT), seniority and thickness (T)
• Granularity is not considered explicitly any more, since external ratings already reflect it
• Risk weights are determined based on a look-up table
• Separate mapping tables for short-term and long-term positions
𝑅𝑅𝑅𝑅 = [RWTranche ∗ (1 − 𝑚𝑚𝑚𝑚𝑚𝑚(𝑇𝑇; 50%)]
RWTranche= RWTranche MT 1 / MT 5 after adjusment of maturities >1 and <5 years through linear interpolation
For non-senior tranches:
1 ≤ MT ≤ 5
RWTranche = RW for MT=1 RWTranche = RW for MT=5
For senior tranches: 𝑅𝑅𝑅𝑅 = RWTranche
16 Basel IV Revisions to the securitisation framework
Securitisation Standardised Approach (SEC-SA)
Fig. 6 SEC-SA: Key Points
SECStandardised Approach
• Implementation of the Simplified Supervisory Formula Approach (SSFA)• The only approach permitted for resecuritisations• Consideration of tranche maturity (MT)• p=1 for nonSTC securitisations, p=1,5 for resecuritisations, p=0,5 for STC securitisations• Input parameter should be available for at least 95% of the securitised exposures
Revisions to the securitisation framework Challenges and Impacts The Solution: PwC’s SECCTSimple, Transparent and
Comparable (STC) Securitisations
16
Securitisation Standardised Approach (SEC-SA)
Basel IV - Revisions to the securitisation framework
SEC-Standardised Approach (SEC-SA)
• Implementation of the Simplified Supervisory Formula Approach (SSFA)
• The only approach permitted for resecuritisations
• Consideration of tranche maturity (MT)
• p=1 for non-STC securitisations, p=1,5 for resecuritisations, p=0,5 for STC securitisations
• Input parameter should be available for at least 95% of the securitized exposures
RW = KSSFA(KA) ∙ 12,5
𝑅𝑅𝑅𝑅 = 𝐾𝐾𝐴𝐴 − 𝐴𝐴𝐷𝐷 − 𝐴𝐴 ∙ 12,5 + 𝐷𝐷 − 𝐾𝐾A
𝐷𝐷 − 𝐴𝐴 ∙ 12,5 ∙ 𝐾𝐾𝑆𝑆𝑆𝑆𝑆𝑆𝐴𝐴(𝐾𝐾𝐴𝐴)
KA ≤ A < KA < D ≤ KA
RW = 1,250 %
𝐾𝐾𝐴𝐴 = 1 − 𝑅𝑅 ∙ 𝐾𝐾𝑆𝑆𝐴𝐴 + 𝑅𝑅 ∙ 0,5
𝐾𝐾𝑆𝑆𝑆𝑆𝑆𝑆𝐴𝐴(𝐾𝐾A) = (e𝑎𝑎∙𝑢𝑢 − 𝑒𝑒𝑎𝑎∙𝑙𝑙)/𝑎𝑎(𝑢𝑢 − 𝑙𝑙)
a = −(1/(p ∙ KA))u = 𝐷𝐷 − KA
l = max(𝐴𝐴 − KA; 0)𝑅𝑅 = 𝑑𝑑𝑒𝑒𝑙𝑙𝑑𝑑𝑑𝑑𝑑𝑑𝑢𝑢𝑒𝑒𝑑𝑑𝑑𝑑𝑑𝑑 𝑟𝑟𝑎𝑎𝑟𝑟𝑑𝑑𝑟𝑟
A, B, C, D, E: Technical Parameters for calibration of p(dependent on granularity of portfolio)
Basel IV Revisions to the securitisation framework 17
Simple, transparent and comparable (STC) securitisations
18 Basel IV Revisions to the securitisation framework
Objectives of STC Securitisations
Help all parties to a securitization in evaluating ist risks & returns by comparing different products within an asset class
Completion of securitization framework by adding specific own funds requirements for STC securitisations Foster simplicity by setting incentives to use
STC-securitisations (although RWA expected to rise for STC as well)
Assist investors in undertaking due diligences without replacing the performance of due diligences
Protect investors from risks arising from inadequate “Originate-to-distribute“-business models
Strike an an appropriate balance between risk sensitivity, simplicity and comparability
Revisions to the securitisation framework Challenges and Impacts The Solution: PwC’s SECCTSimple, Transparent and
Comparable (STC) Securitisations
2
3
4
1
5
Basel IV Revisions to the securitisation framework 19
• Legal Enforceability of asset sale• No other encumbrance• Clear availability criteria• No active portfolio management• Homogeneity• No resecuritization• No defaulted positions• At least on payment took place• Cashflows do not substantially
depend on sale of securities• Positions originated by the
originator
• Access to statistical/historical data especially regarding defaults and price development
• External verificiation of the sample
• Liabilitycashflowmodel before and after pricing (ongoing)
• Joint compliance of Originator, Sponsor, SSPE with transparency requirements (disclosure)
• Risk retention• Mitigation of noncredit risk (i.e.
currency and interest rate risk)• Atarm´s length interest rates• No retention of substantial
currency amounts in SPV• Prepayment events in revolving
structures• Definitions, remedies and actions
relating to delinquency • Rules for conflict settlement
Criteria for STC Securitisations
STC Criteria
Simple Transparent Comparable
Fig. 7 Overview of STC-Criteria
20 Basel IV Revisions to the securitisation framework
The supervisory parameter p fixed at 0.5
10% floor for risk weights for senior exposures and in general lower risk weights compared to the consultation phase
The supervisory parameter p depends on factor x which is fixed at 0,5
Capital Treatment for STC Securitisations
Revisions to the securitisation framework Challenges and Impacts The Solution: PwC’s SECCTSimple, Transparent and
Comparable (STC) Securitisations
SECExternal Ratings Based Approach
Fig. 8 Overview of Changes to RWA calculation
SECInternal Ratings Based Approach
SECStandardised Approach
20
Capital Treatment for STC Securitisations
Basel IV - Revisions to the securitisation framework
SEC-Internal Ratings Based Approach
The supervisory parameter p depends on factor x fixed at 0,5
SEC-External Ratings Based Approach
10% floor for risk weights for senior exposures and in general lower risk weights compared to the consultation phase
SEC-Standardised Approach
The supervisory parameter p fixed at 0.5
𝑝𝑝 = max[0,3; (𝐴𝐴 + 𝐵𝐵 ∗ 1𝑁𝑁 + 𝐶𝐶 ∗ 𝐾𝐾𝐼𝐼𝐼𝐼𝐼𝐼 + 𝐷𝐷 ∗ 𝐿𝐿𝐿𝐿𝐷𝐷 + 𝐸𝐸 ∗ 𝑀𝑀𝑇𝑇) ∗ 𝐱𝐱]
Basel IV Revisions to the securitisation framework 21
Challenges & Impacts
22 Basel IV Revisions to the securitisation framework
Conclusion
Revisions to the securitisation framework Challenges and Impacts The Solution: PwC’s SECCTSimple, Transparent and
Comparable (STC) Securitisations
Significant increase of risk weights and capital requirements through the establishment of the new approaches
Incentives for STC securitisations through preferential capital treatment. Yet, new risk weights are still higher compared to those under CRR
Increased data requirements compared to the current approaches
✓
Basel IV Revisions to the securitisation framework 23
The Solution: PwC’s SECCT
24 Basel IV Revisions to the securitisation framework
SECCT – SECuritisation Calculator Tool
Revisions to the securitisation framework Challenges and Impacts The Solution: PwC’s SECCTSimple, Transparent and
Comparable (STC) Securitisations
• PwC has developed an Accessbased tool to calculate capital requirements using the current and the new approaches also for STC securitisations
• Test calculations for SECIRBA, SECERBA, SECSA and EU propositions• Integration of graphical results in the project documentation and presentation• Extensive practical trials of the tool in various preliminary studies
✓
Basel IV Revisions to the securitisation framework 25
Our Services
26 Basel IV Revisions to the securitisation framework
Our ExpertiseWhether regarding the Basel Committee, EU-regulation or national legislation –we use our established know-how of the analysis and implementation of new supervisory regulation to provide our clients with high-quality services. Embedded into the international PwC network, we have access to the extensive knowledge of our experts around the world.
PwC’s Global Basel IV Initiative was established to support you in all aspects of getting compliant with the new regulatory requirements to the securitisation framework.
PwC can draw on long lasting experience of implementing new regulatory requirements by supporting a number of banks in completing quantitative impact studies prior to the implementation of Basel II and Basel III and by the functional and technical implementation of the final regulations. The PwC-tools used during the QIS are flexible and will be updated automatically in case of newconsultations by the Basel Committee.
Basel IV Revisions to the securitisation framework 27
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Basel IV Revisions to the securitisation framework 29
Contacts
30 Basel IV Revisions to the securitisation framework
Global Basel IV LeaderMartin Neisen Tel: +49 69 [email protected]
Global Basel IV Standardised Approaches Workstream LeaderAgatha PontikiTel: +44 20 721-33484 [email protected]
AustriaAndrea VollmannTel: +43 1 501 [email protected]
Australia Katherine Martin Tel: +61 (2) 8266-3303 [email protected]
BelgiumAlex Van TuykomTel: +32 2 [email protected]
CEEJock NunanTel: +381 [email protected]
Contacts
Basel IV Revisions to the securitisation framework 31
CyprusElina ChristofidesTel: +357 22555-718 [email protected]
DenmarkJanus MensTel: +45 [email protected]
Lars NorupTel: +45 [email protected]
EstoniaAgo ViluTel: +372 [email protected]
FinlandMarko LehtoTel: +358 20 [email protected]
FranceMarie-Hélène Sartorius Tel: +33 1 56575-646 [email protected]
GermanyStefan RöthTel: +49 69 [email protected]
GreeceGeorgios ChormovitisTel: +30 210 [email protected]
32 Basel IV Revisions to the securitisation framework
Hong KongKishore RamakrishnanTel: +852 [email protected]
HungaryEmöke Szántó-KapornayTel: +36 [email protected]
IrelandCiaran CunnininghamTel: +353 1 [email protected]
ItalyPietro PenzaTel: +39 6 [email protected]
Gabriele GuggiolaTel: +39 346 [email protected]
LatviaTereze LabzovaTel: +371 [email protected]
LithuaniaRimvydas JogelaTel: +370 5 [email protected]
Basel IV Revisions to the securitisation framework 33
LuxembourgJean-Philippe MaesTel: +352 49 [email protected]
MaltaFabio AxisaTel: +356 [email protected]
Netherlands Abdellah M’barkiTel: +31 88 [email protected]
Jan WilleTel: +31 88 [email protected]
PolandPiotr BednarskiTel: +48 22 [email protected]
Zdzislaw SuchanTel: +48 22 [email protected]
PortugalLuís BarbosaTel: +351 213 [email protected]
RussiaNikola [email protected]
34 Basel IV Revisions to the securitisation framework
SloveniaPawel PeplinskiTel: +386 1 [email protected]
Czech RepublikMike JenningsTel: +420 251 [email protected]
Spain/AndorraAlvaro GonzalezTel: +34 915 684-155 alvaro.benzo.gonzalez-coloma@ es.pwc.com
SwedenAndré WallenbergTel: +46 10 [email protected]
SwitzerlandReto BrunnerTel: +41 58 [email protected]
UkraineLyudmyla PakhuchaTel: +380 44 [email protected]
United KingdomNigel WillisTel: +44 20 [email protected]
Hortense HuezTel: +44 20 [email protected]
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