Regulatory Capital & Liquidity Standards

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The recent financial crisis demonstrated that some financial companies had grown so large, leveraged and interconnected that their failure could pose a threat to overall financial stability.  To mitigate the “too big to fail” perception, bank regulators are taking action to improve the banking sector’s ability to absorb shocks arising from financial and economic stress.  Each of these actions will have an economic impact on a banks who participate in the securitization market. 

• Risk-Based Capital Requirements: Under the Basel III risk-based capital rules, a bank will be subject to higher capital requirements.  Among other things, the new rules change the methodology a bank must use for calculating the risk weights of several categories of assets (including securitization exposures) against which capital must be held.

• Liquidity: Under the liquidity coverage ratio (LCR), a bank will be required to hold enough high quality liquid assets that can be immediately converted to cash to meet its liquidity needs (including unfunded credit and liquidity commitments in securitization transactions) for a 30-day stress period. Under the proposed net stable funding ratio, banks must maintain stable funding against a stable funding requirement that is calibrated to reflect the presumed degree of stability of liabilities (including unfunded credit and liquidity commitments in securitization transactions) and liquidity of assets.

• Leverage: Under the new leverage ratio requirements, a large, complex bank will be required to hold higher levels of capital against its exposures (including off-balance sheet exposures in securitization transactions).

• Large Exposure Limits: Under the proposed large exposures framework, the amount of a bank’s credit exposures to any single unaffiliated company will be capped at a specified percentage of the bank’s capital. A bank holding a securitization exposure would be required to “look through” the issuer of the exposure to obligors on the financed assets in calculating these exposure limits.