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THE
implementation of Basel II and the recent developments
in the credit markets have given banks both the
opportunity and the impetus to rethink their current
processes and policies around securitizations. In some
senses, it is probably unfortunate that the credit
crunch and liquidity squeeze has hit the markets this
year; due to the timing of firms’ implementation of
Basel II systems and methods, the processes to
capitalize and report securitizations effectively is
currently still work in progress within many banks.
As we
considered in Basel Briefing 12, under Basel II the
capital requirements for securitization positions are
stricter, with less opportunity for capital arbitrage
and more sophisticated reporting requirements. This is
particularly the case for liquidity facilities that have
been one of the major causes of the problems over the
recent months.
As part
of their preparations for Basel II, banks that
securitize their own assets are focusing on the
following aspects:
§
Transparency: In order to control the securitized
portfolio effectively, banks need to be able to look
into central systems to identify assets that have been
securitized rather than having to analyze local systems
to obtain that information. This has implications for
both local and central systems with regard to the
flagging of securitized assets (IT infrastructure).
§
Economic
capital management: For the purposes of managing
economic capital, the bank should be able to attribute
economic capital to each asset as if it were securitized
and as if it were not securitized to be able to compare
positions and enhance portfolio optimization.
§
Predeal
analysis: This should ensure that each and every new
securitization meets both internal and external
requirements, including the regulatory compliance
requirements set out in Basel II. One area that is of
particular relevance given the recent events is the
ability to demonstrate that significant risk transfer
has taken place. Firms are now finding themselves
between the devil and the deep blue sea, facing a choice
between standing behind some of their structured product
structures (and therefore bringing all the assets back
on balance sheet) and letting them go (and therefore
facing possible litigation and reputational damage).
§
Controls: Firms need to define explicit policies, which
should include the definition of tasks and
responsibilities, the accounting and regulatory
treatment and the associated processes.
§
Consolidation: The bank should be able to consolidate by
special investment vehicle (SIV) or special purpose
vehicle (SPV). This could be an issue for larger banks,
where different local entities may hold securitization
positions in the same structures.
As part
of their preparations for Basel II, banks who fulfill
the role of investor or sponsor are focusing on the
following aspects:
§
Clear,
central policy around securitization definition: To
determine whether the securitization complies with the
Basel II definitions, the bank should have a clear,
central policy in place. This could be combined with a
checklist and a sound process that checks the outcome
with a central database.
§
Clear,
central policy around risk weight approach: The bank
should have a clear, central policy in place to be able
to determine which approach (e.g., Irba, RBA) is
applicable for the calculation of risk-weighted assets.
§
Internal
Assessment Approach (IAA): Where firms are looking to
apply the IAA, they should set up the IAA with good
governance and validation of the associated models.
Within this process, there is a role for internal
auditors.
The new
requirements within the securitization framework that
has been introduced with Basel II will lead to more
insight into the securitization structures currently in
place within the industry. They should also lead to
better management of the structures due to the
regulatory requirements regarding policies, processes
and procedures. Though it is unlikely that Basel II
could have prevented the credit crunch and the liquidity
squeeze, the revised securitization requirements might
have had some impact on the reputations of banks as they
might have been able to communicate better to the market
about their positions.
(This
article is an excerpt from a thought leadership document
entitled “Basel Briefing 13” by KPMG International. The
information contained herein is of a general nature and
is not intended to address the circumstances of any
particular individual or entity. Although we endeavor to
provide accurate and timely information, there can be no
guarantee that such information is accurate as of the
date it is received or that it will continue to be
accurate in the future. No one should act on such
information without appropriate professional advice
after a thorough examination of the particular
situation. KPMG and the KPMG logo are registered
trademarks of KPMG International, a Swiss cooperative.
For
comments or inquiries, please e-mail KPMG Markets:
Elizabeth R. Locsin, markets principal, at elocsin@kpmg.com.ph;
or Gillian de Guzman, marketing communications officer,
at gddeguzman@kpmg.com.ph.) |
