In an effort to address the role of securitization in causing and spreading the damage during the financial crisis, global regulators are revising the capital rules in this area, and looking for new ways to revive that market.
The Basel Committee on Banking Supervision is proposing revisions to the regulatory framework for securitizations that aims to address a number of weaknesses in the existing rules, and to strengthen the capital standards for banks’ securitization exposures. The committee notes that the financial crisis highlighted several weaknesses in the current capital rules, including a blind reliance on external credit ratings, a lack of risk sensitivity, and insufficient capital requirements for certain exposures. The proposed changes, which aim to fix these weaknesses, will come into effect in January 2018.
“The revised securitization framework addresses a number of shortcomings of the securitization market revealed in the financial crisis, and represents a significant improvement to the Basel II framework,” said Stefan Ingves, chairman of the Basel Committee and governor of Sveriges Riksbank. “The committee has developed a risk sensitive and prudent framework, while also reducing complexity and a mechanistic reliance on external ratings.”
At the same time, following review into the factors that may be hindering the development of sustainable securitization markets, the Basel Committee and the International Organization of Securities Commissions (IOSCO) also issued a set of proposed criteria that could be used to help identify simple, transparent and comparable securitizations. In 2015, the Basel Committee will consider how to incorporate these criteria into the capital rules too.
“Investors’ confidence in securitisations has diminished since the onset of the financial crisis. Securitisations are perceived as too complex and insufficient information is available to investors to perform their risk assessments. The proposed criteria in this paper try to address some of these issues,” said Greg Medcraft, chairman of the IOSCO board and of the Australian Securities and Investments Commission (ASIC).
Comments on the proposed criteria are due by Feb. 13, 2015.