The Global Financial Markets Association (GFMA) and other associations such as the Institute of International Finance, the International Swaps and Derivatives Association and the Commercial Real Estate Finance Council Europe (together, the Joint Associations) have written to the Basel Committee on Banking Supervision (BCBS) setting out their observations which the BCBS is asked to consider as it moves towards completing its work on the proposals set out in the second consultative document, Revisions to the Basel securitisation framework.
In the letter, the Joint Associations set out certain concerns including that the current proposals will not meet the BCBS’ stated objective of comparability, resulting instead in capital requirements that are neither comparable among calculation methods nor proportionate to risks. To this end the BCBS is asked to extend the timetable for the finalisation of the proposed framework to address the identified shortcomings. The BCBS is also called on to undertake further work which should refine the calibration of the proposed framework and especially to improve the consistency of results between the internal ratings-based approach (IRBA), the external ratings-based approach (ERBA) and the standardised approach (SA).
The letter also refers to a report that was commissioned by the GFMA which looked at certain data provided by its member banks. The letter argues that the findings of the report demonstrate that more work is needed to refine the calibration of the proposed framework and to improve the consistency of results between the IRBA, the ERBA and the SA. The report makes a number of observations including:
- for each asset class, when one compares the average risk weights calculated using the IRBA, ERBA and SA, the capital requirements under the three approaches are very different and lack consistency;
- even when average risk weights look comparable across the three approaches, the rank order correlations of individual tranche risk weights are often low; and
- ERBA risk weights are often higher than SA risk weights both on average and for individual exposures.