Client Alert
On March 19, 2026, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (collectively, the “Federal Bank Regulators”) issued for comment joint Notices of Proposed Rulemaking (the “NPRs”) proposing changes to the US bank capital regulations. The NPRs propose several changes to the regulations for determining required capital for bank securitization exposures and additional changes that will impact securitization exposure capital charges. While the proposed changes impact banks originating both traditional and synthetic securitizations of their own assets, and securitization exposures in the form of derivatives, and provide a new method for determining the risk weights of exposures to non-performing loan (“NPL”) securitizations, this Client Alert focuses on the impact of the proposed rules on banks investing in securitization transactions (other than NPL securitizations), both by buying asset-backed securities with the intent to hold such securities1 and by providing financing of securitizations by making loans or entering into asset purchase facilities, either directly or through credit and liquidity facilities provided to asset-backed commercial paper (“ABCP”) conduits.
The NPRs replace a joint notice of proposed rulemaking issued on July 27, 2023 (the “2023 Proposal”). As discussed below, many of the proposed changes to the securitization provisions of the risk-based capital regulations are similar or identical to the proposed changes to these provisions in the 2023 Proposal, with some important differences described below. The NPRs can be found here.
Advanced Approaches Replaced with Expanded Risk-Based Approach for Category I and II Banks—Revised Standardized Approach Would Apply to Category III and IV Banks
One of the new proposals would replace the internal models-based approach to determine risk-based capital in the “advanced approaches” capital rules currently applicable to Category I and Category II banking organizations (see chart below for a description of these Categories) with new so-called risk sensitive standardized requirements (the “expanded risk-based approach” or “ERBA”) that would apply to these banking organizations and could be opted into by Category III and IV banking organizations. Another of the proposals would modify the standardized approach for determining risk-based capital requirements that apply to Category III and IV banking organizations. The version of the ERBA proposed in the 2023 Proposal would have applied to all banking organizations with $100 billion or more of total assets (i.e., Category I, II, III and IV banking organizations). Importantly, the securitization provisions of both the newly proposed ERBA and proposed revisions to the standardized approach are substantively identical. As described below, however, risk-based capital requirements would vary in some instances between the two approaches given that the risk weights for the exposures underlying securitization exposures that are used to determine capital are different under the proposed ERBA and the proposed revisions to the standardized approach.
“Dual Stack” Approach to Calculating Capital Not Included
Under the 2023 Proposal, in order to satisfy the requirements of the so-called Collins Amendment to the Dodd-Frank Act2, the required risk-based capital for all banks subject to the expanded risk-based approach (i.e., Category I, II, III and IV banking organizations) would have been the higher of the required capital determined under the new expanded risk-based approach and the required capital determined under the current standardized approach. No changes were proposed in the 2023 Proposal to the current standardized approach for determining the required capital for securitization exposures. Under the new ERBA proposal, there is no requirement that a banking organization applying the ERBA (i.e., Category I and II banking organizations and Category III and IV banking organizations that opt in to the ERBA) also determine capital under the proposed revised standardized approach. It is not clear from the new proposals why the Federal Banking Regulators now view such calculation not to be required to satisfy the Collins Amendment.
Change to the Definition of Traditional Securitization
The new proposals would revise the definition of traditional securitization to “clarify” that performance of an exposure must depend solely on the performance of the underlying exposures in order to be a securitization exposure. There could not be any expectation that any sources outside of the underlying exposures would fund the interest or principal payments due on the securitization exposures. If adopted, this would mean that exposures supported by partial guarantees or other forms of limited recourse not funded by cash flows of the underlying financial asset exposures would no longer qualify as securitization exposures.
SFA and SSFA Replaced With SEC-SA
For purposes of determining required capital for a securitization exposure under the expanded risk-based approach and the revised standardized approach, the new proposals would replace the current supervisory formula approach (“SFA”) applicable under the advanced approaches and the simplified supervisory formula approach (“SSFA”) that is applicable under the current standardized approach with a modified version of the SSFA called the securitization standardized approach (“SEC-SA”), which would include, relative to the SSFA, modified definitions of attachment point and detachment point, a modified definition of the W parameter, modifications to the definition of KG, a lower risk-weight floor for securitization exposures that are not resecuritization exposures, and a higher risk-weight floor for resecuritization exposures, all as discussed further below. In addition, as also discussed further below, the new proposals contain modifications to the risk weights of the exposures underlying securitization exposures for purposes of determining KG and a new risk weight cap for certain senior securitization exposures. The new proposals would eliminate the gross-up approach for calculating risk-weights for securitization exposures. If all of the inputs are not available to determine capital using the SEC-SA, the exposure would be assigned a 1,250% risk weight.
Modifications of Definitions of Attachment and Detachment Points
Under the existing capital rules, the attachment point (parameter A) of a securitization exposure is the ratio of the current dollar amount of underlying exposures that are subordinated to the exposure to the current dollar amount of underlying exposures and the detachment point of a securitization exposure (parameter D) is the threshold at which credit losses on the exposure would result in the total loss of principal of the exposure. The new proposals would require the funded portion of any reserve account funded by the accumulated cashflows from the underlying exposures that is subordinated to the banking organization’s securitization exposure in the calculation of parameter A and D. In addition, a banking organization would not be allowed to include interest rate derivative contracts and exchange rate derivative contracts, or the cash collateral accounts related to these instruments, in the calculation of parameters A and D, since none of these instruments provide credit enhancement to the exposure.
One proposed change in the 2023 Proposal that was not included in the new proposals was to modify the definitions of parameter A and D so that they referred to the outstanding balance of the underlying assets in the pool rather than the current dollar value of the underlying exposures as they do under the current rules. This was viewed as a beneficial change because by referencing the outstanding balance of the underlying assets instead of the current dollar amount of the underlying exposures, the revised definition would clarify that nonrefundable purchase price discounts could be recognized when calculating the credit enhancement of a securitization exposure.
Modifications of the Definition of Parameter W
Parameter W is the ratio of defaulted exposures underlying a securitization exposure to the outstanding balance of all underlying exposures. As was the case in the 2023 Proposal, the new proposal would clarify that for resecuritization exposures, any underlying exposure that is a securitization exposure would only be included in the denominator of the ratio and would be excluded from the numerator of the ratio. Underlying securitization exposures need not be included in the numerator because the risk weight of the underlying securitization exposures already reflect the impact of any delinquent or otherwise nonperforming loans within the underlying securitization exposures. The new proposals would also exclude from parameter W exposures that are unconditionally guaranteed by the US government, its central bank, or a US government agency up to the amount of the guarantee.
Modification of Definition of KG
KG is the weighted average (based on total principal outstanding) of the total capital of the exposures underlying the securitization exposures. As was the case under the 2023 Proposal, under the new proposals, for interest rate derivative contracts and exchange rate derivative contracts, the positive current exposure times the risk weight of the counterparty multiplied by 0.08 would be included in the numerator of KG but excluded from the denominator of KG. If amounts related to interest rate and exchange rate derivative contracts were included in both the numerator and denominator of KG, these contracts could reduce the capital requirement of securitization exposures even though interest rate and exchange rate derivatives do not provide credit enhancement to the relevant securitization exposure.3
Parameter p Unchanged
Parameter p is a supervisory parameter included in the capital calculation to ensure “appropriately conservative” capital levels for securitization exposures. Under the SSFA, parameter p is 0.5 for securitization exposures that are not resecuritization exposures and 1.5 for resecuritization exposures. These p factors would remain unchanged under the new proposals. Under the 2023 Proposal, for purposes of calculating capital under the SEC-SA, parameter p would have been increased to 1.0 for securitization exposures that are not resecuritization exposures and would have remained 1.5 for resecuritization exposures. This would have substantially increased the required risk-based capital for certain securitization exposures.
Lower Risk Weight Floor for Securitization Exposures That Are Not Resecuritization Exposure
As was the case in the 2023 Proposal, the new proposals would apply a risk weight floor of 15% for securitization exposures that are not resecuritization exposures. The current capital rules apply a 20% risk weight floor to these exposures.
Higher Risk Weight Floor for Resecuritization Exposures
For resecuritization exposures, as was the case with the 2023 Proposal, the new proposals would require banking organizations to apply a risk-weight floor of 100%. These exposures are subject to the 20% floor under the current rules.
Modified Risk Weights for Underlying Exposure
The new proposals would modify the risk weights of several types of underlying exposures that would be used to calculate KG as compared to the existing standardized approach. Some of the modified risk weights are different as between the ERBA proposal and the proposal modifying the standardized approach, which could lead to different risk-based capital requirements for the same exposure under the two different approaches. We will describe these underlying risk weights in a separate client alert.
New Risk Weight Cap for Senior Exposures, Including Certain Overlapping ABCP Exposure
As was the case with the 2023 Proposal, the new proposals would allow a banking organization to cap the risk weight applied to a senior securitization exposure that is not a resecuritization exposure at the greater of (i) the weighted-average risk weight of the underlying exposures under a new “look-through” approach regardless of the capital determined based on the SEC-SA, and (ii) the 15% risk weight floor. For purposes of calculating the weighted-average risk weight for a senior securitization exposure, the unpaid principal balance would be used as the weight for each exposure. The new proposals define a senior securitization exposure as an exposure that has a first priority claim on the cash flows from the underlying exposures. In determining whether an exposure has a first priority claim on cash flows, banks would not be required to consider amounts due under interest rate derivative contracts, exchange rate derivative contracts, and servicer cash advance facilities, or any fees and other similar payments to be made by the securitization SPE to other parties.
Both the most senior commercial paper issued by an ABCP program and a liquidity facility that supports the ABCP program may be senior securitization exposures under the proposal if the obligation to reimburse the liquidity provider has a first priority claim on cash flows that is senior to all other amounts other than those described above.
Scope of Securitization Exposures Eligible for Overlapping Exposure Treatment Expanded
Consistent with the Basel standards, the new proposals would expand the treatment of overlapping exposures to allow banking organizations to also apply this treatment (1) where one or more of the overlapping securitization exposures would be subject to the expanded risk-based approach and other(s) to the proposed market risk framework, and (2) to securitization exposures that partially overlap for purposes of the expanded risk-based approach.
First, to the extent that one or more overlapping securitization exposures would be subject to the expanded risk-based approach and others to the revised market risk framework, the new proposals would allow banking organizations to reflect only the greater of the risk-based capital requirement produced by the expanded risk-based approach or the market risk capital framework, provided the banking organization is able to calculate and compare the capital requirements for the relevant exposures.
Second, if a banking organization has two or more securitization exposures that partially overlap, the new proposals would permit the banking organization to treat the exposures as overlapping exposures, provided the banking organization can demonstrate that one of its securitization exposures can fully absorb losses arising from its other securitization exposures.
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The NPR also proposes changes to the market risk capital rules that would impact banks buying ABS for their trading books. The potential impact of those changes is also beyond the scope of this Client Alert.
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The Collins Amendment is Section 171 of the Dodd-Frank Act and is codified at 12 U.S.C. Section 5371, which, in part, states: “The minimum risk-based capital requirements established under this paragraph shall not be less than the generally applicable risk-based capital requirements, which shall serve as a floor for any capital requirements that the agency may require, nor quantitatively lower than the generally applicable risk-based capital requirements that were in effect for insured depository institutions as of the date of enactment of this Act.”
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A second modification of KG is proposed with respect to synthetic securitization exposures, discussion of which is beyond the scope of this Client Alert.
