Banks’ claim: more capital rules gonna hurt securitization market

January 24, 2024
1 min read

In recently submitted comment letters, top U.S. bank representatives and a coalition of congressmen adamantly opposed the banking regulators’ proposal reflecting the Basel III capital recommendations, identifying securitizations as an area that will be particularly impacted adversely.

The bipartisan coalition’s letter called asset securitization “crucial to our economy, helping to ensure businesses and consumers have access to affordable financing.” It says that regulators are proposing the “most cautious approach” recommended by the Basel Committee, doubling the capital surcharge for some securitization exposures to a level above what the banking agencies adopted after the Dodd-Frank Act.

Key points:

  • Top U.S. banks and a bipartisan coalition of congressmen have criticized the regulators’ proposal reflecting the Basel III capital recommendations
  • They believe that the proposal will burden the securitization market and have a detrimental impact on businesses and consumers
  • The proposal includes doubling the capital surcharge for some securitization exposures, which banks argue is too stringent

Banking regulators issued the proposed rules July 27, 2023, with a deadline of November 30 to submit comments. That timeline was extended to January 16. In a joint comment letter, the American Bankers Association and Bank Policy Institute expressed similar concerns. They noted the proposal contains no standard by which to determine what an appropriate risk weight should be for credit and operational risk, making it impossible to determine [whether] the costs of higher capital outweigh the benefits.

More specifically, JPMorgan Chase argues that the proposals could use a combination of structural revisions and adjustments to risk weighted-assets (RWA) before finalization. In its 18-page comment, the bank argues that the surcharge placed on Globally Systematic Important Bank should be adjusted for economic growth and the calibration of operational risk for risk-weighted assets, among other proposed revisions. At the start of its 76-page comment letter, the Structured Financial Association (SFA) stated in bold letters that the proposed rule should not be adopted, and that the SFA opposes it.

A key sticking point is the p-factor, which scales up the risk weightings applied to different types of loans in a securitization, and the proposal increases it to 1.0 from 0.5 under current rules. Scott Fame, chief economist and head of policy at the SFA, said that a pool of loans held by a bank in unsecuritized form and subject to an 8% capital charge would see that charge increase to 12% under the current 0.5 p-factor if the bank instead held every tranche of a securitization backed by the same pool of loans. “Under the endgame proposal, with p-factor equal to 1.0, the charge would be 16%,” Fame said, adding that additional capital required by CCAR stress tests could require banks to maintain more capital against the underlying securitization transaction than the underlying exposure itself.

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