Securitization in Basel II

[ahnnecabiles]

Hi David,

According to your post entitled Securitization in Basel II, "if an asset is securitized through a so-called "true sale", the securitized exposure is recast from a single risk-weighted exposure into a set of "blended" risk weights that reflects the sub-divided risks that accompany its tranches". But, isn't it that if the securitized assets have been qualified as a "true sale", they in effect have been removed from the company's balance sheet? Why then we still need to allocate capital charge for those?

Thanks.

 

[David Harper CFA FRM]

Hi Chinquee,

Yes, you are correct. I don't like my own wording. What I meant is, the securitization tends to tranche the exposure so that some may be transferred (and excluded from a charge) and some may be retained. Each retained tranche is treated separately.

Para 554 of Basel II says "An originating bank may exclude securitised exposures from the calculation of risk-weighted assets only if all of the following conditions have been met [e.g., did they transfer risk? did they relinquish control]. Banks meeting these conditions must still hold regulatory capital against any securitisation exposures they retain." So you are correct, exposures that are transferred in true-sale fashion are EXCLUDED but often tranches will be retained, and the retained tranches are assigned risk-weights. In this way, a $10 million exposure can be mostly excluded via securitization and only the retained tranches (exposures) will be charged with capital. (Annex 5 of Basel II has a good example).

David

 

[ahnnecabiles]

Thanks!