Ratings Based Capital Adequacy for Securitizations

39 Pages Posted: 10 Nov 2013 Last revised: 15 Nov 2015

See all articles by Kristina Lützenkirchen

Kristina Lützenkirchen

Leibniz University of Hannover

Daniel Roesch

University of Regensburg

Harald (Harry) Scheule

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network

Date Written: April 24, 2013

Abstract

This paper develops a framework to measure the exposure to systematic risk for pools of asset securitizations and measures empirically whether current ratings-based rules for regulatory capital of securitizations under Basel II and Basel III reflect this exposure. The analysis is based on a comprehensive US dataset on asset securitizations for the time period between 2000 and 2008. We find that the short-fall of regulatory capital during the Global Financial Crisis is strongly related to ratings. In particular, we empirically show that insufficient capital is allocated to tranches with the highest rating. These tranches account for the greatest part of the total issuance volumes. Furthermore, this paper is the first to calibrate risk weights which account for systematic risk and provide sufficient capital buffers to cover the exposure during similar economic downturns. These policy-relevant findings suggest a re-calibration of RBA risk weights and may contribute to the current efforts by the Basel Committee on Banking Supervision and others to re-establish sustainable securitization markets and to improve the stability of the financial system.

Keywords: Asset-Backed Security, Basel II and III, Collateralized Debt Obligation, Economic Downturn, Mortgage-Backed Securities, Home Equity Loan Securities, Ratings-Based Approach, Regulation, Regulatory Capital, Risk Weights, Securitization

JEL Classification: G20, G28, C51

Suggested Citation

Lützenkirchen, Kristina and Roesch, Daniel and Scheule, Harald, Ratings Based Capital Adequacy for Securitizations (April 24, 2013). Journal of Banking and Finance, 37, 2013, 5236-5247, CIFR Paper No. 010/2014, Available at SSRN: https://ssrn.com/abstract=2347342

Kristina Lützenkirchen

Leibniz University of Hannover ( email )

Institut fur Rechnungslegung und WP
Koenigsworther Platz 1
Hannover, 30167
Germany

Daniel Roesch (Contact Author)

University of Regensburg ( email )

Chair of Statistics and Risk Management
Faculty of Business, Economics and BIS
Regensburg, 93040
Germany

HOME PAGE: http://www-risk.ur.de/

Harald Scheule

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

P.O. Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://https://www.uts.edu.au/staff/harald.scheule

Financial Research Network ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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