BCBS Proposes Risk Weight Floor for NPL Securitisations

Source: Regulation Asia Editors, Regulation Asia 2020-06-24

The BCBS identified a gap in the regulatory framework for securitisations of non-performing loans, which it is seeking to address through a new technical amendment.

The BCBS (Basel Committee on Banking Supervision) has published in a new paper a draft technical amendment establishing a 100% risk weight floor for certain senior tranches of non-performing loan securitisations, i.e. when securitised portfolios comprise at least 90% of defaulted assets.

The risk weight applicable to the other securitisation exposures are to be determined by the existing hierarchy of approaches, in conjunction with a 100% risk weight floor and a ban on the use of certain inputs for capital requirements, the BCBS says.

The amendment does not change the capital requirements applicable to securitisations of performing assets.

The BCBS started developing the proposal before the onset of the Covid-19 pandemic to address a gap in the regulatory framework for securitisations of non-performing loans.

The existing standard was designed and calibrated using a range of securitisation transactions, all of which involved performing assets, the paper says.

However, securitisations consisting mostly of non-performing loans have since shed light on a potential miscalibration of the applicable risk weights under the Basel III securitisation framework.

The amendment, available here, is open for comment until 23 August.

BCBS

NPL Securitisations

BCBS Proposes Risk Weight Floor for NPL Securitisations

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