In the quantitative study that was undertaken to determine how the new capital framework affects the securitisation markets, FitchRatings found that Basel II seemed to establish fairly strong capital incentives for IRB banks to securitise commercial mortgages and credit card receivables through commercial mortgage-backed securities (CMBS) and credit card asset-backed securities (ABS) structures.
The study analysed a range of portfolios representing different underlying assets, including CMBS, credit card ABS, and collateralised debt obligations (CDOs) of corporate debt.
The study found that Basel II could influence how securitisation deals are structured, with banks facing strong regulatory capital incentives to minimise their exposure to sub-investment-grade tranches.
“Generally, IRB banks will have to hold less capital on rated securitisation tranches than on tranches that do not have an external rating from a recognised credit rating agency. In certain cases, the ratings-based approach (RBA) generates much lower capital requirements than the supervisory formula on the same securitisation position,” the report says.
But Martin Hansen, the director of credit policy at FitchRatings in New York, says it is not clear whether Basel II could generally increase securitisations in the market. “It is hard to say whether this will increase the securitisations overall, because that will depend on the various attributes of particular transactions taken by banks. For instance, it will depend on the asset size of the deal and how it is structured.
“The incentives to invest in rated structures differ across product types. For instance, the capital charges in CDOs and unsecuritised asset pools were very similar,” says Hansen.
The securitisation charges for IRB banks depend on whether the position held has a credit rating from a recognised rating agency. For all securitisation tranches with a credit rating, IRB banks must use the ratings-based approach, which links the capital charge to the external credit rating of the position, giving better-rated positions lower Basel II capital charges.
But for unrated securitisation exposures, IRB banks must use a formula specified in the Basel II regulation that generates a capital charge based on various attributes of the structure and the riskiness of the underlying assets.
Hansen says banks that are active players in the securitisation markets are carefully anticipating the implementation of Basel II, given its potential impact not only on their appetite for structured products but, more broadly, on the way they manage their credit portfolio.