Basel II & securitisation
The capital treatment of securitisation transactions has been one of the most difficult areas to be determined in the new framework. This is reflected by the fact that from the initial phases of development of the framework, securitisations were dealt as a separate issue, and that number of publications solely related to the theme were issued by the Basel Committee, where the final publication contains chapters exclusively dedicated to securitisation. These are Pillar 1, chapter IV and Pillar 2, chapter V.
In summary, there are two key issues that made securitisations a difficult area for the Basel Committee:
- The inherent level of complexity existing in securitisation transactions and the fact that there is little standardisation.
It is worthy to note that, albeit in an implicit way, Basel II analyses securitisation as either a risk transfer tool or a funding tool, and tend to disregard the other potential drivers. In order to accommodate transactions which are neither risk transfer nor funding, Pillar 2 provides certain level of discretion to supervisory authorities in the application of the rules.
- The fact that supervisory authorities, and law-makers, have adopted different approaches to securitisation transactions.
Overview of the Basel II chapters related to securitisation
Chapter IV of pillar 1 is the most important with regards to the capital treatment for securitisation transactions as it details all quantitative aspects as well as the key qualitative aspects (i.e. operational requirements) to be taken into account when calculating the capital requirements of securitisation transactions.
Chapter V of Pillar 2 can be substantially considered a complement to the operational requirements already defined in Pillar 1. In summary, the chapter provides the necessary support for supervisory authorities to modify, or refine, the calculation of capital requirements in order to take into account the specifics of each securitisation transaction, and any factors, which have not been directly dealt by the existing framework.
If you want to know more about Basel II and securitisation, we refer to the Part III of our brochure Structuring securitisations transaction in Luxembourg
