Basel III and Regulatory Capital and Liquidity Requirementsfor Securitizations

Abstract

One of the most significant challenges facing banks participating in the securitization markets is the impact that more stringent capital and liquidity requirements proposed by the Basel Committee on Banking Supervision may have on the cost to these institutions and their customers of participating in these markets in the future. Additional requirements imposed by the so-called Basel 2.5 and Basel III proposals will substantially affect the incentives of banks to securitize their own assets and to invest in securitizations. In particular, the new liquidity coverage ratio that would be imposed by Basel III could require dollar-for-dollar liquid asset coverage of bank credit and liquidity commitments to securitization structures, including asset-backed commercial paper conduits, greatly increasing the cost of providing these facilities. Further complicating the issue for U.S. banks are the Collins Amendment to the Dodd–Frank Act, which imposes a capital floor on U.S. banks at the levels required when the Dodd–Frank Act was adopted, and Section 939A of the Dodd–Frank Act, which requires the removal of credit ratings from all federal regulations, including the capital regulations. This presentation, an explanation of regulatory capital and liquidity requirements for securitizations followed by a question and answer session on Basel III and structured finance, outlines the most significant aspects of these proposals that affect securitizations. <b>TOPICS:</b>Legal and regulatory issues for structured finance, information providers/credit ratings