changes ahead sign
iStock.com / gerenme

Amid the economically devastating global pandemic that’s expected to drive higher loan losses, the Basel Committee on Banking Supervision is revising the capital rules for non-performing loan securitizations.

The group of global banking regulators has published a technical amendment that aims to close a regulatory gap for the capital treatment of securitizations that contain failing loans.

“These transactions are subject to different risk drivers compared to securitizations of performing assets,” the Basel Committee said in a notice outlining the changes.

Recent experience with non-performing loan securitizations “have shed light on potential risk weight miscalibration,” the group said.

Under the new provisions, exposures to securitization of non-performing loans “will be subject to 100% risk weight or higher, except for positions risk-weighted using external ratings-based approach,” the group said.

The Basel Committee noted that it began working on the capital rules for non-performing loan securitizations before the onset of Covid-19.

The committee launched a consultation on the issue in June, and has made a couple of changes to its original proposals as a result of that exercise.

The deadline for adopting the revisions in local banking rules is January 2023.