Small and medium enterprises (SME) are the engine of the European economy and the most important generator of new jobs. However, since the crisis many banks have reduced their lending to SME, especially in the European periphery, causing additional stress to the sector and further slowing growth.
On this page OSIS™ will provide blogs, research, case studies and models to support SME lending by banks directly or by investment by institutional investors i.e. through securitization.
In October 2014 EBA published a theoretical exercise where it compared the capital charge of bank loans before and after securitisation. The exercise was based on theoretical tranchings and artificial portfolios based on an earlier EBA research called “Third interim report on the consistency of risk-weighted assets”. The results show that in various current and new regulatory approaches the capital charge after securitisation is 2 to 5 times higher than before. It is obvious that in these occasions securitisation is and remains inefficient instrument and won’t be used by banks for liquidity or capital optimisations and banks will rather continue their funding lines with the ECB or reduce lending.
European Banking Federation, BNP Paribas, RiskControl and OSIS did a similar exercise, this time on real SME securitisations from 41 different issuers from Italy, Spain, France, Belgium and the Netherlands. For each deal we were able to use all necessary inputs like PD, LGD, EAD, weighted average maturity and company size on a loan by loans basis for various regulatory capital calculations. The data came from the European Data Warehouse in Frankfurt, which maintains a database with more than 30 million securitised bank loans.
In our exercise we have used 12 different approaches to compute capital before and after a securitisation.
External Credit Ratings-Based:
1. Current RBA
2. Current SA
3. BCBS ERBA
4. Current SFA
5. Current US SSFA-SA
6. BCBS SSFA-IRBA
7. BCBS SSFA-SA
8. Calibrated CMA
9. Calibrated Modified SSFA (two p’s)
10. Calibrated SSFA (one p)
11. European SSFA-IRBA
12. European SSFA-SA
The results are accessible on LoanCracker™, the OSIS analytical database. It confirms the exercise by EBA on external ratings but also shows the effects of alternatives. We provide the capital charge of each loan portfolio after securitisation (blue bar) and the proportion with capital charge before securitisation (black diamond).
In order to get access please click and use as logon name: securitisation and as password: regulation.LoanCracker™ Securitisation & Regulation
We believe that the results are self explanatory. In case of any questions or remarks please contact us at email@example.com
If banks securitize assets on their balance sheet they can reduce regulatory capital if they can demonstrate that they will realize a significant risk transfer. The regulator has defined several criteria based upon which a significant risk transfer can be determine but the ultimate discretion rests with the national supervisor.
In order to determine the amount of reduced regulatory capital, the current framework has established two main approaches. The first method in the hierarchy is an external rating based approach using the credit rating on a sold tranche from a recognized credit rating agency, the second method is an internal rating based approach using the Supervisory Formula.
In the current Supervisory Formula the bank can calculate the reduction of regulatory capital by providing the KIRB (percentage regulatory capital), the average LGD and amount of loans in/on the underlying pool of assets and the credit enhancement and thickness of the sold tranche(s).
In December 2013 Basel has issued its second consultation paper specifically on securitization since the crisis called “Revisions to the securitisations framework”.
In the new framework the regulator aims for a:
– reduction of mechanistic reliance on external ratings,
– increase in the risk weight on senior tranches,
– reduction of the risk weight on junior tranches and
– reduction of cliff effects.
On order to calculate the effects on regulatory capital the regulator has proposed three approaches:
– Internal Rating Based Approach,
– External Rating Based Approach and
– Standardised Approach.
The first remarkable difference with the current approach is the change in hierarchy between external- versus internal rating based approach. Apparently the regulator wants to encourage regulated investors to obtain more detailed information on the underlying pool of loans in order to estimate PD and LGD which are in return important inputs to the new supervisory formula.
In order to evaluate the other three objectives we have implemented the current Supervisory Formula in a small tool next to the new formula. The tool can help banks to conduct a feasibility study for capital relief securitisations. In order to get free access to the tool please fill in the form below. You will receive an email with the link to the online tool.