OSFI has released an Advisory re Securitization – Expected Practices.
It’s mostly motherhood, but there are some interesting highlights:
Effective immediately, GMD liquidity facilities provided by Canadian FREs will no longer result in zero capital usage (e.g. a 0% credit conversion factor will cease to apply under the standardized approach) and will, regardless of the approach (e.g. standardized approach; internal ratings based approach) used to measure risk arising from securitization exposures, receive the same credit conversion factors and capital treatment as global style liquidity facilities. In particular, when using an internal ratings-based approach, no reduction in risk exposure for a liquidity facility will apply if it is structured as a GMD liquidity facility and such facility shall be treated in a manner consistent with global style liquidity facilities. This guidance reflects that, while GMD liquidity facilities may not exhibit material credit risk, recent events have shown that other risks do exist (such as reputational risk) [Footnote] and that, consequently, a capital charge is appropriate.
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Footnote: GMD facilities have been converted to global style facilities in support of sponsored conduits.
OSFI misses the point here. It was not the GMD facility that created reputational risk – it was the sponsorship. There has been no effect on the foreign banks that provided GMD facilities for the Canadian ABCP, because they weren’t sponsoring the conduits.
There is no need to increase the capital charge for GMD – this move simply represents OSFI caving to a few uninformed headline writers. I’d prefer to have an independent regulator, frankly.
In a related example:
Effective October 31, 2008, new securities issued by securitization SPEs, other than securities issued as a result of the “Montreal Accord”, must be rated by at least two recognized ECAIs to permit, in the case of any securitization exposure related to such securities, the use of a standardized or internal ratings-based approach, or an Internal Assessment Approach13, by a FRE14. In all cases where a securitization exposure arises from a re-securitization and the exposure is acquired after October 31, 2008, the securities issued by the re-securitization SPE (or such securitization exposure), other than securities issued as a result of the “Montreal Accord”, must be rated by two recognized ECAIs to permit a FRE to use a ratings-based or Internal Assessment Approach for such exposure. further, in the case of a re-securitization exposure acquired after October 31, 2008, the Supervisory Formula under CAR can only be applied based on the ultimate underlying assets (e.g. the third party loans or receivables giving rise to cash flows) and not based upon securities issued by any underlying securitization.
Now, me, I’d rather have one good credit analysis than two bad ones, but maybe that’s just me.
I do support their efforts on resecuritization:
While re-securitizations share many of the same issues and features as securitizations of unsecuritized assets, because additional risks exist, it may not be appropriate to apply the same risk assessment and capital adequacy measures to re-securitizations as are applied to other securitizations. For example, reliance on the credit ratings ascribed to the securitization exposures held by the re-securitization may be misleading unless a detailed analysis of the underlying assets in the underlying securitizations is performed (e.g. to ensure that those assets will perform as expected under stress test scenarios and that those underlying assets do not pose any concentration risks and provide sufficient diversity).
This is attempting to get at the correlation of default behaviour – copulas, in technical parlance – without actually using the word! But it’s a start.