Tougher Capital Requirements Likely to Raise Costs of Securitization and Affect Bank Strategy

by: Research Recap

Standard & Poor’s Ratings Services says the new, stricter regulatory capital requirements for banks announced in September by the Bank for International Settlements’ are likely to increase the cost of securitization.

The BIS announcement marked the adoption of several revisions to the regulatory capital framework–collectively known as Basel III–that the Basel
Committee on Banking Supervision (BCBS) had previously proposed to address some of the main issues that arose during the credit crisis.

Basel III includes some specific changes to banks’ treatment of securitization exposures when calculating their capital requirements, including:

  • The application of a 1250% risk weight to some lower-rated and unrated securitization exposures;
  • The introduction of more conservative collateral haircuts (discounts) for securitization collateral with respect to counterparty exposure; and
  • The introduction of specific risk haircuts for securitization exposures when calculating the capital requirement related to market risk.

“We believe the adoption of the Basel III capital requirement platform is likely to raise the cost of securitization and could influence the strategies of banks that originate or invest in structured finance transactions,” said Standard & Poor’s credit analyst Jaiho Cho. “With the more-conservative capital reserve requirements for certain securitization exposures, banks may look for ways to reduce their existing exposures and will likely also try to reduce the potential capital charges arising from new transactions.”