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Treasury recommends that banking regulators rationalize the capital required for securitized products with the capital required to hold the same disaggregated underlying assets.
Treasury recommends that U.S. banking regulators adjust the parameters of both the simplified supervisory formula approach (SSFA) and the supervisory formula approach (SFA).
- The p factor, already set at a punitive level that assesses a 50% surcharge on securitization exposures, should, at minimum, not be increased.
- SSFA should recognize the added credit enhancement when a bank purchases a securitization at a discount to par value.
- Regulators should align the risk weight floor for securitization exposures with the Basel recommendation.
Treasury recommends that bank capital requirements for securitization exposures sufficiently account for the magnitude of the credit risk sold or transferred in determining required capital instead of tying capital to the amount of the trust consolidated for accounting purposes.
Treasury recommends that regulators consider the impact that trading book capital standards, such as fundamental review of the trading book (FRTB), would have on secondary market activity. Capital requirements should be recalibrated to prevent the required amount of capital from exceeding the maximum economic exposure of the underlying bond.
Treasury recommends that the Federal Reserve Board consider adjusting the global market shock scenario for stress testing to more fully consider the credit quality of the underlying collateral and reforms implemented since the financial crisis.
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