18. Securitization: General Provisions

Banks must be able to access performance information on the underlying pools on an ongoing basis in a timely manner. Such information may include, as appropriate: exposure type; percentage of loans 30, 60 and 90 days past due; default rates; prepayment rates; loans in foreclosure; property type; occupancy; average credit score or other measures of credit worthiness; average loan-to- value ratio; and industry and geographical diversification. For resecuritizations, banks should have information not only on the underlying securitization tranches, such as the issuer name and credit quality, but also on the characteristics and performance of the pools underlying the securitization tranches. 18.34 A bank must have a thorough understanding of all structural features of a securitization transaction that would materially impact the performance of the bank’s exposures to the transaction, such as the contractual waterfall and waterfall-related triggers, credit enhancements, liquidity enhancements, market value triggers, and deal-specific definitions of default. Calculation of Capital Requirements and Risk-Weighted Assets 18.35 Regulatory capital is required for banks’ securitization exposures, including those arising from the provision of credit risk mitigants to a securitization transaction, investments in asset-backed securities, retention of a subordinated tranche, and extension of a liquidity facility or credit enhancement, as set forth in the following sections. Repurchased securitization exposures must be treated as retained securitization exposures. 18.36 For the purposes of the expected loss (EL) provision calculation set out in chapter 15 , securitization exposures do not contribute to the EL amount. Similarly, neither general nor specific provisions against securitization exposures or underlying assets still held on the balance sheet of the originator are to be included in the measurement of eligible provisions. However, originator banks can offset 1250% risk-weighted securitization exposures by reducing the securitization exposure amount by the amount of their specific provisions on underlying assets of that transaction and non-refundable purchase price discounts on such underlying assets. Specific provisions on securitization exposures will be taken into account in the calculation of the exposure amount, as defined in 18.19 and 18.20 . General provisions on underlying securitized exposures are not to be taken into account in any calculation. 18.37 The risk-weighted asset amount of a securitization exposure is computed by multiplying the exposure amount by the appropriate risk weight determined in accordance with the hierarchy of approaches in 18.41 to 18.48. Risk weight caps for senior exposures in accordance with 18.50 and 18.51 or overall caps in accordance with 18.52 to 18.55 may apply. Overlapping exposures will be risk-weighted as defined in 18.38 and 18.40. 18.38 For the purposes of calculating capital requirements, a bank’s exposure A overlaps another exposure B if in all circumstances the bank will preclude any loss for the bank on exposure B by fulfilling its obligations with respect to exposure A. For example, if a bank provides full credit support to some notes and holds a portion of these notes, its full credit support obligation precludes any loss from its exposure to the notes. If a bank can verify that fulfilling its obligations with respect to exposure A will preclude a loss from its exposure to B under any circumstance, the bank does not need to calculate risk-weighted assets for its exposure B.