Dec 21 - The latest proposals from the Basel Committee on Banking Supervision on the capital
treatment of securitisation exposures are inconsistent with the strong performance of most
structured finance securities, Fitch Ratings says. We believe the proposed capital
treatment could significantly dent appetite for securitised debt among banks.
The Committee estimates that its proposals would sharply increase risk weights.
We think these rises would result in excessive capital charges relative to the
low actual losses on most SF notes. For example, the risk weighting for a
'AAAsf' rated senior tranche with a five-year maturity rises to 58% under both
proposed hierarchies from the present 7% under the ratings-based approach. For
an 'AA+sf' rated five-year senior tranche, the risk weights jump to 75% from 8%.
We expect total losses on the USD9.5trn of Fitch-rated SF bonds issued during
2000-2011 to be less than 5%. Losses are disproportionately driven by US RMBS,
which represent well over half of global SF losses, but accounted for less than
a third of supply. Moreover, losses on prime US RMBS are considerably lower than
on Alt-A and subprime deals.
We forecast losses on EMEA RMBS transactions to be significantly lower, at 0.2%.
We do not expect losses on Fitch-rated notes in the largest European RMBS
markets, the UK prime and Dutch prime sectors. ABS transactions have been
resilient. We forecast total losses of 0.5% on US deals and 0.2% on EMEA deals.
Overall, pre-2008 deals account for over 99% of the total losses we project.
Post-crisis transactions benefit from higher credit quality, and greater credit
protection. One driver of increased credit protection at a given rating level
has been the revision of rating criteria since the crisis. More detail is
available in our October report "Global Structured Finance Losses".
The Basel Committee announced a consultation on its securitisation framework on
Tuesday. It is considering two possible systems (hierarchy A and hierarchy B)
that would both be "significantly different" from Basel 2.5. They more closely
align the standardised approach (SA) and the internal ratings-based approach
(IRB). For example, they would extend the 20% risk-weight floor in the SA
securitisation framework to banks using the IRB approach, where the floor is
currently 7%. They also distinguish among securities with different maturities.
Responses to the Basel Committee's proposals are due by 15 March 2013. The
Committee will also conduct a quantitative impact study on the proposals. We
intend to comment further in January.