Securitization and Basel

[vedig]

Hi David

if a bank use securitization to remove loans from the balance sheet why are there capital charges? Actually the banks sold the loans in a true sale and generates cash.

Do a bank receive a capital charge if it generates securitization products or only if it possess it or both?

Thank you for your answer.

Regards

Vedi

 

[ShaktiRathore]

Before david can reply, this is my point of view:
Basically banks shed-off the loans in form of debts to financial institutions and mortgages through securitisation. Capital charges are used to cover the unexpected sudden losses that can occur due to some risk in the market or some major credit event taking place. Losses the bank can suffer due to adverse market movements or counter-party defaulting are unexpected and some reserve is required to be maintained by the bank to cover these losses in form of the capital charge. Whereas the securitization will collect a pool of loans and securitise them thereby passing on the risk to the investors. Securitization i think is in no way related to the capital charge. Securitization reduces debt risk on bank's balance sheets while capital charge is a set aside reserve for covering up the unexpected losses.

thanks

 

[vedig]

Hi Shakti

Thank you for the answer. But in the Basel II chapter, these approaches for securitization are mentioned:

• External Rating-Based Approach
• Supervisory Formula
• Internal Assessment Approach

I don't understand when a bank should use one of these. For the issued or bought securities?

Thanks

Vedran

 

[ShaktiRathore]

Yes fallacy in my answer there is some consideration given to securitization (lower risk weight) while calculating the capital charge but securitization and capital charge are different concepts. While determining capital charge the securitizations products are treated differently based on any of the method given above.

thanks