The implication of Basel II on securitisation transactions of banks

M.Comm.The securitisation industry started in the early 1970s in the United States when securities, backed by pools of home loans, were issued for the first time. During the 1980s, securities supported by other types of financial assets such as auto loans and credit card receivables were issued. Since then, securitisation has expanded rapidly into many countries, including South Africa. The first securitisation transaction in South Africa was a securitisation of home loans in 1989, but very few securitisations came to the market after that. In December 2001 the South African Reserve Bank amended the securitisation regulations, which had been in existence since 1992. This created greater certainty for arrangers and investors, and from 2002, the South African securitisation market has grown quickly, driven by frequent securitisation issues by banks. Securitisation is attractive for banks, because it is an additional funding source and allows for the matching of the maturity of a bank’s assets and liabilities. Another reason for the attractiveness of securitisation for banks is that it is a mechanism for managing the regulatory capital that a bank is required to hold. In a securitisation transaction, a loan originator such as a bank sells loans on its balance sheet to an independent company, which issues asset-backed securities to fund the acquisition of loans. Provided the transaction complies with the securitisation regulations, the transaction will result in the bank having to hold less regulatory capital compared to a situation where it had not securitised the loans. This “regulatory capital arbitrage” has been a major factor in banks’ securitising loans. Regulatory capital arbitrage is possible because of the relatively simplistic manner in which the Basel I capital adequacy guidelines calculate the regulatory capital a bank is required to hold. Given the worldwide growth of the securitisation industry, regulators have become increasingly concerned that banks may not be holding adequate capital as a buffer for the economic risks to which banks are exposed. The Bank for International Settlements, through its Basel Committee on Banking Supervision, has therefore devised a new set of capital adequacy guidelines to replace the Basel I guidelines. The aim of the new Basel II framework is to achieve a greater alignment of regulatory capital with economic risks and to improve risk management practices in banks. Although the Basel Committee cannot enforce its recommendations, it is expected that most regulators throughout the world will adopt the Basel II framework. It is generally expected that the implementation of Basel II will have a substantial impact on banks’ securitisation activities, especially to the extent that securitisation has been used for regulatory capital arbitrage purposes