The Prudential Treatment of Residential Mortgage Backed Exposures Under Basel III Finalisation

1. Introduction

In the wake of the Global Financial Crisis of 2007-2009 (hereinafter: Financial Crisis) there was a broad consensus in the international community that the financial regulatory framework for banks required a thorough revision. This view was strongly supported by the participants of the G20 summits in London and Pittsburgh in 2009, which summits culminated in the Basel III accord (hereinafter: Basel III) in 2011,2 adopted by the Basel Committee on Banking Supervision (hereinafter: BCBS). The Basel III accord was set out to significantly revamp the 'old' Basel II3 framework that entered into force a couple of years earlier. Surprisingly, the international framework in respect of the credit risk posed by mortgage exposures was not significantly amended by Basel III. Mortgage backed securities, and securitisations more broadly, did receive some attention, though the underlying (sub-prime) mortgages were not heavily impacted from a capital fra...

Verder in dit artikel:

1. Introduction

2. Background on prudential risk weighting of mortgages

2.1. Prudential risk weighting

2.2. The valuation of residential property

3. Standardised approach (SA) to the (credit) risk weighting of residential mortgage loans

4. Internal Ratings Based Approach

5. Concluding remarks