New elegant solution proposed to the problems of the current securitisation proposals on bank capital

As PCS has consistently argued, the current proposals regarding capital requirement for banks’ holding securitisations appears excessive when compared to the capital required to hold the underlying assets (the “non-neutrality problem”).  In addition, the approach inherited from the Basel Committee of a hierarchy of analyses, when applied to the differing regulatory and general conditions of the United States and the European Union leads to an unfair and punitive treatment of European banks compared to their US counterpart.

PCS has, in the past, argued for a recalibration of the excessively and inexplicably punitive “external ratings based approach” (“ERBA”) that the European banks will need to apply to the vast majority of their securitisation holdings.  However, a recently published paper by Duponcheele, Linden and Perraudin makes a compelling case for a more elegant solution involving the re-ordering of the proposed hierarchy and changes to the way in which the “internal ratings based approach” (“IRBA”) can operate so as to solve both the problem on non-neutrality and the unbalanced treatment of European and US banks.

Duponcheele, Linden and Perraudin analyse the Commission’s proposals for reviving European securitisations. The authors identify with great clarity key features of the proposals that may vitiate their success including the proposed hierarchy of capital approaches. The hierarchy, in particular, implies a dominant role for the ERBA which is highly conservative for many European deals. The authors propose remedies including an extension in the use of proxy data permitting greater use of the Securitisation IRBA and the promotion in the hierarchy of the Securitisation Standardised Approach. The paper can be found at: http://www.riskcontrollimited.com/insights/comment-commission-proposals-securitisation/