Basel III new securitization framework and STC criterion applied from January 2018

The New Basel III securitization framework issued in 2016 and came into force on January 2018.

The New Basel III securitization framework issued in 2016 and came into force on January 2018.

Summary of the new Basel 3 framework with STC criteria

This new framework simplifies the approach:

  • Integrates an alternative capital treatment for Simple Transparent and Comparable securitizations (STC). These STC securitizations require less capital as risk weights and risk-weight capping are lower, so they are made more advantageous in the STC framework compared to the previous framework.
  • Less reliance on external ratings,
  • Takes risks sensitivity into account.

Synthetic securitization and Asset backed commercial paper are out of the scope for the STC framework that applies only to Simple Transparent and Comparable operations.

Four approaches made available by the standards of the STC framework are:

  • The internal rating approach, subject to supervisory approval and sufficient information,
  • The external rating approach, if the exposure or a similar one is rated by external rating agencies,
  • The standard approach,
  • The flat 1.250% risk weighting approach if none of the previous approaches can be used.

However due to regulation discrepancies between regions of the world, the new framework will probably not be implemented everywhere. This is working against the creation of an international level playing field in securitization.

What are the STC (simple, transparent and comparable) criteria for securitization?

To be considered STC, a transaction in securitization has to comply with the following requirements:

  • Simplicity: The underlying asset has to be homogeneous and the transaction structures not overly complex,
  • Transparency: The underlying asset, structure and counterparties involved are backed with sufficient and easily available information. The risks have to be clearly explained and understood.
  • Comparability: the transaction should be easy to compare against other securitization transactions, underlining especially differences in jurisdictions.

What are the key changes between the new STC framework and the previous Basel Committee framework?

The new STC framework generally simplifies the approaches available to the bank to compute the regulatory capital requirement and risk weighting of a transaction.

Basel II framework was very complex. It offered many different approaches for rated (2 internal approaches, 2 standard approaches) and non-rated transactions (2 internal approaches), in addition to many specific treatments. The simplified hierarchy of the STC framework only provides 3 approaches: the internal ratings-based approach, the external ratings-based approach, and the standardized approach. Only the availability of information and the bank’s ability to perform analyses and not the bank’s role in the transaction define the method to use.

Basel II framework required the use of external ratings when available. Under the Basel III framework the external ratings approach is downgraded to the second place, and internal ratings-based approach is topping the hierarchy.

Basel III framework is giving a better regulatory capital requirement allocation with regards to the actual risk exposure. A risky transaction will require more capital under the new framework, and at the same time a STC transaction will require less capital under the Basel III framework. The risk drivers under the revised framework are differentiated between approaches. In the internal approach, tranche maturity is an additional risk factor. In the external rating approach, the tranche maturity and tranche thickness are additional risk factors.


Matthieu Liatard
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