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Credit Securitisations and Derivatives: Challenges for the Global Markets by Harald Scheule, Daniel Rösch

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17

Regulatory Capital Requirements for Securitizations

Kristina Lützenkirchen1 Daniel Rösch1 and Harald Scheule2

1Leibniz University of Hannover

2University of Technology, Sydney

17.1 REGULATORY APPROACHES FOR SECURITIZATIONS

Asset securitizations are one of the most significant developments in financial intermediation in recent years. Financial institutions use vehicles such as asset-backed securities (ABSs), collateralized debt obligations (CDOs) or mortgage-backed securities (MBSs) to restructure the asset risks of their portfolios and transfer these to investors. Thus asset securitizations enable financial institutions to liquidate assets, transfer risk and consequently release capital. The Basel Committee on Banking Supervision develops capital adequacy rules for deposit-taking financial institutions and provides a capital relief for institutions which transfer credit risk to other investors. In a standard structure, the credit portfolio risk is partially transferred and partially retained. As a result, a deposit-taking institution, which partially transfers credit portfolio risk, may partially release regulatory capital. Under regulations which are currently implemented, banks may apply the following three approaches: at present two different ways for financial institutions that have received the approval to use the IRB Approach to determine regulatory capital for securitized assets are provided: the Ratings Based Approach (RBA) and Supervisory Formula Approach (SFA). Non-IRB ...

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