Editor: David Reiss
Brooklyn Law School

April 3, 2013

S&P’s Coy-ful Analysis of Basel Securitization Framework

By David Reiss

S&P has long taken the public position that ratings from an NRSRO (like S&P or Moodys) should not be required.  This position would seem to be against its own interest and thus be quite public spirited.

Its recent Response to Consultation on Basel Securitization Framework may make one question whether it really stands by that public position after all.

The response raises a “number of significant concerns” about proposed revisions to the Basel securitization framework:

  • In seeking to reduce the framework’s reliance on external ratings, the proposals increase its reliance on various formula-based approaches. These generally do not take into account the full range of factors that can affect the creditworthiness of a securitization exposure, potentially undermining the framework’s risk sensitivity.
  • Because the proposed framework includes at least five different approaches to calculating securitization capital charges, there is significant scope for inconsistencies in treatment between different banks and/or jurisdictions.  . . .
  • Notwithstanding the Committee’s aim of ensuring more prudent capital charges for some securitization exposures, we question whether the losses experienced by securitizations globally since the 2007-2008 financial crisis warrant the scale of increase in capital charges that the proposals would result in, especially for investment-grade tranches.
  • Our analysis suggests that in many situations the Revised Ratings-Based Approach (RRBA) leads to significantly higher capital charges than the other proposed approaches, which suggests the RRBA may be incorrectly calibrated.
  • Although the proposals envisage various capping mechanisms to mitigate the risk of excessively high capital charges, our analysis suggests that these caps could determine capital charges in many situations, rather than being an exception. . . . (2)
The first two concerns appear to argue that NRSROs are necessary to the rating process.  The second two appear self-interested (consistent with their behavior for years) in that they argue against higher capital charges.  Higher capital charges would slow the growth of the securitization market and thus their own rating business income. Given that S&P had gotten its models for RMBS so wrong, it is disconcerting to see it oppose capital requirements that might err the other way for once.  And the last concern — that the exception may swallow the rule — is deliciously ironic, given that that was a major problem with S&P’s ratings of RMBS during the boom. As always, S&P’s input on this topic must be viewed through the lens of its self-interest to ensure that its positions are in the public interest.
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