Basel I Capital Treatment of Asset Sales with Recourse

# Regulatory capital requirement for asset sales with recourse in the First Basel Accord


# Regulatory capital requirement for asset sales with recourse in the First Basel Accord












In a BCBS working paper which listed the drawbacks of the first Basel Accord, CAPITAL REQUIREMENTS AND BANK BEHAVIOUR: THE IMPACT OF THE BASLE ACCORD by Patricia Jackson et al., at p. 23, is written:

> In cases when securitised assets have been previously “owned” by the bank, its credit enhancement is treated as “recourse,” which normally incurs an effective 100% (dollar-for-dollar) regulatory capital requirement. That is, the bank’s total regulatory capital requirement ratio is calculated as if the recourse position was immediately written off.

but I didn't manage to find this rule in the First Basel Accord.

In a footnote of the working paper is also specified:

> Typically, recourse incurs a total risk-based capital requirement equal to the lesser of (a) the amount of recourse provided (“low-level recourse”), and (b) 8 percent of the enhanced assets (i.e. equivalent to assigning a 100 percent risk-weight to the amount of enhanced assets).

In the Basel I document, the only place where I find "recourse" is in the table of the Credit Conversion Factors:

> Sale and repurchase agreements and asset sales with recourse, where the credit risk remains with the bank 100%

Where is the rule cited in the working paper?

Edit: making some further research I found a US Government document, THE FINANCIAL CRISIS INQUIRY REPORT, where it's written:

> In October 2001, they introduced the “Recourse Rule” governing how much capital a bank needed to hold against securitized assets. If a bank retained an interest in a residual tranche of a mortgage security, as Keystone, Superior, and others had done, it would have to keep a dollar in capital for every dollar of residual interest. That seemed to make sense, since the bank, in this instance, would be the first to take losses on the loans in the pool. Under the old rules, banks held only 8% in capital to protect against losses on residual interests and any other exposures they retained in securitizations; Keystone and others had been allowed to seriously understate their risks and to not hold sufficient capital. Ironically, because the new rule made the capital charge on residual interests 100%, it increased banks’ incentive to sell the residual interests in securitizations—so that they were no longer the first to lose when the loans went bad.

So, is the dollar-for-dollar only a US rule? Does the standard Basel I framework implied only a regulatory capital for asset sales with recourse = 100% (CCF) $\cdot$ risk weight of the assets $\cdot$ 8%?