On July 11, the Basel Committee on Banking Supervision (Basel Committee) published a revised regulatory capital framework for securitizations (Revised Framework) that incorporates final standards for the alternative and more favorable regulatory capital treatment for “simple, transparent, and comparable” securitizations (STCs).
Since the economic downturn in 2008, global and national regulatory authorities have struggled to devise regulatory capital standards that both capture the risks inherent in structured transactions while encouraging the recovery and growth of sustainable securitization markets. In general, the actions taken by the Basel Committee and other national regulatory authorities have imposed relatively stringent regulatory capital standards for securitization transactions, based on the perceived risks embedded in complex transaction structures.
The Revised Framework is the result of the Basel Committee’s continuing efforts to better align the risks associated with diverse types and complexities of securitizations with their corresponding regulatory capital requirements. The Basel Committee expressly stated its intent to create more granularity for determining securitization capital requirements to assure that transactions with “higher-risk underlying exposures” would not receive the same capital treatment as perceived lower-risk STCs.
The Revised Framework builds on, among other things, the July 2015 STC criteria published by the Basel Committee and the International Organization of Securities Commissions. Notably, the Basel Committee has adopted a 10% risk weight floor for senior tranches of qualifying STCs, down from the 15% floor proposed in 2015. STC securitization transactions would be eligible for more favorable capital treatment under all of the international approaches for the calculation of risk-based capital under the Basel Committee capital framework (the Standardized Approach, the External Ratings-Based Approach, and the Internal Ratings-Based Approach).
An STC transaction, however, must satisfy multiple factors relating to the underlying assets, deal participants, and structural risk to be considered an STC. One main focus is the risk of the underlying assets, and the final STC criteria incorporate multiple prerequisites for underlying assets, including terms regarding their granularity, homogeneity, transparency, performance history, and risk weights. Other criteria relate to the structural risk of the deal itself, including requirements for clear disclosure, underwriting standards, payment and voting rights, limited interest rate and currency exposure, and the presence of risk retention. The STC criteria also consider the experience of the originator and require strong reporting capabilities and guidelines for the servicer.
In general, the STC criteria are consistent with the prior Basel Committee proposal, with consideration of underlying asset risk weights being one notable addition. Asset-backed commercial paper (ABCP) conduit transactions, however, would not qualify for capital relief under the STC scheme unless such conduits could fit within the STC criteria and conditions.
The Revised Framework will come into effect in January 2018, although it still must be implemented at the national level by the Basel Committee’s member jurisdictions. The US federal regulatory agencies have not formally signaled their intentions vis-à-vis the adoption of the Revised Framework, although the fact that the United States is a member jurisdiction of the Basel Committee ordinarily should favor the adoption of the Revised Framework in the United States.