Basel II, Securitization, and Credit Risk

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Basel II, Securitization, and Credit Risk

• ???
• Hsien-hsing Liao
• ?????????/?
• Department of Finance/National Taiwan U.

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Framework of Basel II
Standard
Credit Risk
IRB
Pillar one
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Capital Requirement
Market Risk
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?????
Pillar two
Operating Risk
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Pillar Three
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Color shaded areas indicate new elements in
Basel II
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Special Section for Securitization--- In Pillar I
of Basel II
Standard
Capital Requirement
RBA
Have External Rating
IRB
No External Rating
SFA
4
Risk weights for securitization
exposures---Standard approach
For Originating banks with Long-term rated
exposures
Rating AAAAA AA- BBBBBB- BBBB- Below B or unrated
Risk weight 20 50 100 deduction Deduction
For Investing banks with Long-term rated
exposures
Rating AAAAA AA- BBBBBB- BBBB- Below B or unrated
Risk weight 20 50 100 350 Deduction
For short-term rated exposures
Rating A-1/p-1 A-2/P-2 A-3/P-3 Others or unrated
Risk Weight 20 50 100 Deduction
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IRB (for credit risk)

• Internal Risk modelling
• Risk Weightsƒ(PD, LGD, maturity)
• PD Probability of default
• LGD Loss given default
• The estimation of parameters
• Basic Approach (Internal estimated PD)
• Advanced Approach(All internally estimated)

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RBALong-term rated exposures
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RBAShort-term rated exposures
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Rating-Based Approach---the Parameters-1

• Factors influencing risk weights under RBA
• Long-term or short-term exposures
• Granularity of asset pool measured by N, the
  Effective Number of exposures, defined as
• EADiExposure at default of the ith asset

9
Rating-Based Approach---the Parameters-2

• Priority(Q)
• Qdefined as tranche sizes that are above AA-
  but subordinated to the current tranch divided by
  total size.
• EX. For tranche A, its Q(2030)/1000.5

A AAA 30
B AAA 20
C AA 30
D BBB 20
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Supervisory Formula Approach,SFA
??????????????????? ????????????? Max0.0056T,
SLT-SL ??S.?????(Supervisory Formula)

• BetaLa,b???L?????a.b??? Beta????
• ?1000, ?20

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SFA Concept
KIRB the ratio of capital requirement before
securitization to total securitized assets
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Simplified SFA (SSFA)
Announced on Jan.30 2004 SSFA does not need
portfolio LGD?

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SSFA calculation
A20 B30 C20

I4 i 0 1
2 3 4
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SSFA sensitivity to I
????????????LGD??0.685,??????????????,????LGD?0.2-
0.5???
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SSFA sensitivity toL
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SSFA?????N
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Summary of capital requirements of BASEL II
KIRB the ratio of capital requirement before
securitization to total securitized assets
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The Impact of New Basel Accord

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• ?????????BB?BB-???????????????????????
• ???????????????KIRB???,????????????????????,??????
  ??????????????????????
• ????????
• ???????????????????????,especially difficult for
  asset pool across several countries. Credit
  portfolio multi-period credit default
  correlation and contagion

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???????????(?)

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  ????????
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?????????????(?)

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?????????????????

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• ???????????????????100?????
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• ????????20350,??????????
• ??????????7650,??????????
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25
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• ?????(Deduction)???
• ??50????????,?50?????????
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Synthetic CDO
Synthetic CDO
AAA L20bp
100MM 100 Reference Portfolio Credit Default S
waps
Fixed Payment
LiborSpread
SPV
Bank
AA L90bp
Cash
Credit Event
BBB L300bp
Cash
Swap Counterparty
Libor
Equity
Collateral
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• Thank you for attention!

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??????????(?)

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• ??????????????????????????,???????(client
  confidentiality)????????????????
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• ?????Max (100,???????????????)
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• ???????(simplified SF)

• I???????????????????????????
• I1?????????
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• (1)KIRB
• (2)??????(L)
• (3)???????????????(thickness,T)
• (4)??????????????(N)?
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SFA?????L
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SFA?????T
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SFA?????T
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SFA?????N
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SFA?????KIRB
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SSFA?????T
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SSFA????? KIRB
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????????????????-1

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• ????????????????????????(degree)???????
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????????????????-2

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• ??????????(credit derivatives)????????(CLN)??????
  ??(CDS)???????????????????????????
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CDS -Definition
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CDS-Application
Synthetic CDO
AAA L20bp
100MM 100 Reference Portfolio Credit Default S
waps
Fixed Payment
LiborSpread
SPV
Bank
AA L90bp
Cash
Credit Event
BBB L300bp
Cash
Swap Counterparty
Libor
Equity
Collateral
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????????????????-3

• ???????????(exposure)???
• ????????????(???????)
• ABS
• MBS
• Credit enhancement
• Liquidity enhancement
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• ??????(cash collateral account)
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????????????????-4

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• ????(Originating bank)
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• ?????????(ABCP)??(conduit)?????????????,??????????
  ???????????(?)?????
• ????(Investing bank)
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????????????????-5

• ??????--KIRB???
• KIRB??????????????????????????????????????????????
  ?????????????????15,?KIRB??0.15?

????KIRB????? ?????????????1000,?KIRB?0.15,?????
?150?????????(tranche)??????KIRB????
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?????????????-1

• ??????????(securitization exposures)??????????????
  ????
• ???????????????????????????????,??????????,???????
  ????????
• ?????????????,??,?????????????????????????

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?????????????-2

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  ????
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?????????????-3

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• ??????????????????????????????(first loss
  position)??????
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??????????????-1

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• ??????????????BB-???????
• ???????????????BBB-???????
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• ??

50
??????????????-2

• ???(guarantor)????????????,???????????????????????
  ??????????20?????????????????????????????????????
  ????
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??????????????-3

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  ???????????(yield payable)????
• ?????????,????????????????????????????(retained
  first loss position)?

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53
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• ????????????????????????????????????????(credit
  mitigants)????????????????????????????????????
• ?????(Deduction)
• --?????????????????????????,??50????????,?50?
  ????????

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??????????????? ?????

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• ??????????????????????(unrated)?????????????????
  ??????????,?????????
• ?????????????????KIRB?????????,????KIRB??,???????
  ?????????,????????????????

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57
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• ???????????????KIRB???,????????????????????,??????
  ??????????????????????
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58
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• ???????(off balance sheet)
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  ??????????????????????????????????????????????????
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60
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61
?????????????????

• ??????
• ???????????????????100?????
• ?????
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• ????????20350,??????????
• ??????????7650,??????????
• ??????????????????,??????????????????

62
??????????

• ?????(Deduction)???
• ??50????????,?50?????????
• ??????????????????????????,???????????????????????
  
• ????????

63
??????????(?)

• ????????
• ????????????????????????????????????????????
• ??????????????????????????,???????(client
  confidentiality)????????????????
• ??????????????
• ?????Max (100,???????????????)
• ????????????????????????
• ??????????????????????????????????

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?????(D?)??????,????????????
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