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Basel ii Accord
Section 606 to 643 |
4.
Internal ratings-based approach for
securitisation exposures
(i)
Scope
606.
Banks that have received approval to use the IRB
approach for the type of
underlying
exposures securitised (e.g. for their corporate
or retail portfolio) must use the IRB approach
for securitisations. Conversely, banks may not
use the IRB approach to
securitisation
unless they receive approval to use the IRB
approach for the underlying
exposures
from their national
supervisors.
607.
If the bank is using the IRB approach for some
exposures and the standardised
approach
for other exposures in the underlying pool, it
should generally use the
approach
corresponding
to the predominant share of exposures within the
pool. The bank should
consult
with its national supervisors on which approach
to apply to its securitisation
exposures.
To ensure appropriate capital levels, there may
be instances where the
supervisor
requires a treatment other than this general
rule.
608.
Where there is no specific IRB treatment for the
underlying asset type,
originating
banks
that have received approval to use the IRB
approach must calculate capital
charges
on
their securitisation exposures using the
standardised approach in the
securitisation
framework,
and investing banks with approval to use the IRB
approach must apply the RBA.
(ii)
Hierarchy of approaches
609.
The Ratings-Based Approach (RBA) must be applied
to securitisation exposures
that
are rated, or where a rating can be inferred as
described in paragraph 617. Where
an
external
or an inferred rating is not available, either
the Supervisory Formula (SF) or
the
Internal
Assessment Approach (IAA) must be applied.
The
IAA is only available to exposures (e.g.
liquidity facilities and credit enhancements)
that banks (including third-party banks) extend
to ABCP programmes. Such exposures must satisfy
the conditions of paragraphs 619 and 620. For
liquidity facilities to which none of these
approaches can be applied, banks may apply the
treatment specified in paragraph 639.
Exceptional treatment for eligible servicer cash
advance facilities is specified in paragraph
641. Securitisation exposures to which none of
these approaches can be applied must be
deducted.
(iii)
Maximum capital
requirement
610.
For a bank using the IRB approach to
securitisation, the maximum
capital
requirement
for the securitisation exposures it holds is
equal to the IRB capital
requirement
that
would have been assessed against the underlying
exposures had they not been
securitised
and treated under the appropriate sections of
the IRB framework including
Section
III.G. In addition, banks must deduct the entire
amount of any gain-on-sale and credit enhancing
I/Os arising from the securitisation transaction
in accordance with paragraphs 561 to
563.
(iv)
Ratings-Based Approach
(RBA)
611.
Under the RBA, the risk-weighted assets are
determined by multiplying the
amount
of
the exposure by the appropriate risk weights,
provided in the tables below.
612.
The risk weights depend on (i) the external
rating grade or an available
inferred
rating,
(ii) whether the credit rating (external or
inferred) represents a long-term or a shortterm
credit rating, (iii) the granularity of the
underlying pool and (iv) the seniority of
the
position.
613.
For purposes of the RBA, a securitisation
exposure is treated as a senior tranche if
it
is
effectively backed or secured by a first claim
on the entire amount of the assets in
the
underlying
securitised pool. While this generally includes
only the most senior position within a
securitisation transaction, in some instances
there may be some other claim that, in a
technical sense, may be more senior in the
waterfall (e.g. a swap claim) but may
be
disregarded
for the purpose of determining which positions
are subject to the “senior
tranches”
column.
Examples:
(a)
In a typical synthetic securitisation, the
“super-senior” tranche would be treated as
a
senior
tranche, provided that all of the conditions for
inferring a rating from a lower
tranche
are fulfilled.
(b)
In a traditional securitisation where all
tranches above the first-loss piece are
rated,
the
most highly rated position would be treated as a
senior tranche. However, when
there
are several tranches that share the same rating,
only the most senior one in
the
waterfall would be treated as
senior.
(c)
Usually a liquidity facility supporting an ABCP
programme would not be the most
senior
position within the programme; the commercial
paper, which benefits from the
liquidity
support, typically would be the most senior
position.
However,
if the liquidity facility is sized to cover all
of the outstanding commercial paper, it can be
viewed as covering all losses on the underlying
receivables pool that exceed the amount of
over-collateralisation/reserves provided by the
seller and as being most senior.
As
a result, the RBA risk weights in the left-most
column can be used for such
positions.
On
the other hand, if a liquidity or credit
enhancement facility constituted a mezzanine
position in economic substance rather than a
senior position in the underlying pool, then the
“Base risk weights” column is
applicable.
614.
The risk weights provided in the first table
below apply when the external
assessment
represents a long-term credit rating, as well as
when an inferred rating based
on
a
long-term rating is available.
615.
Banks may apply the risk weights for senior
positions if the effective number
of
underlying
exposures (N, as defined in paragraph 633) is 6
or more and the position is
senior
as
defined above. When N is less than 6, the risk
weights in column 4 of the first table
below
apply.
In all other cases, the risk weights in column 3
of the first table below
apply.
RBA risk weights when
the external assessment represents a long-term
credit rating
and/or an inferred
rating derived from a long-term
assessment
616.
The risk weights in the table below apply when
the external assessment
represents
a
short-term credit rating, as well as when an
inferred rating based on a short-term rating
is
available.
The decision rules outlined in paragraph 615
also apply for short-term
credit
ratings.
Use
of inferred ratings
617.
When the following minimum operational
requirements are satisfied a bank
must
attribute
an inferred rating to an unrated position. These
requirements are intended to ensure that the
unrated position is senior in all respects to an
externally rated securitisation
exposure
termed the ‘reference securitisation
exposure’.
Operational
requirements for inferred
ratings
618.
The following operational requirements must be
satisfied to recognise inferred
ratings.
(a)
The reference securitisation exposure (e.g. ABS)
must be subordinate in all
respects
to
the unrated securitisation exposure. Credit
enhancements, if any, must be
taken
into
account when assessing the relative
subordination of the unrated exposure
and
the
reference securitisation exposure. For example,
if the reference securitisation
exposure
benefits from any third-party guarantees or
other credit enhancements that
are
not available to the unrated exposure, then the
latter may not be assigned an
inferred
rating based on the reference securitisation
exposure.
(b)
The maturity of the reference securitisation
exposure must be equal to or
longer
than
that of the unrated exposure.
(c)
On an ongoing basis, any inferred rating must be
updated continuously to reflect
any
changes
in the external rating of the reference
securitisation exposure.
(d)
The external rating of the reference
securitisation exposure must satisfy the
general
requirements
for recognition of external ratings as
delineated in paragraph 565.
(v)
Internal Assessment Approach
(IAA)
619.
A bank may use its internal assessments of the
credit quality of the
securitisation
exposures
the bank extends to ABCP programmes (e.g.
liquidity facilities and credit
enhancements)
if the bank’s internal assessment process meets
the operational
requirements
below. Internal assessments of exposures
provided to ABCP programmes
must
be mapped to equivalent external ratings of an
ECAI. Those rating equivalents
are
used
to determine the appropriate risk weights under
the RBA for purposes of assigning
the
notional
amounts of the exposures.
620.
A bank’s internal assessment process must meet
the following operational
requirements
in order to use internal assessments in
determining the IRB capital requirement arising
from liquidity facilities, credit enhancements,
or other exposures extended to an ABCP
programme.
(a)
For the unrated exposure to qualify for the IAA,
the ABCP must be externally
rated.
The
ABCP itself is subject to the
RBA.
(b)
The internal assessment of the credit quality of
a securitisation exposure to
the
ABCP
programme must be based on an ECAI criteria for
the asset type purchased
and
must be the equivalent of at least investment
grade when initially assigned to
an
exposure.
In addition, the internal assessment must be
used in the bank’s internal
risk
management processes, including management
information and economic
capital
systems, and generally must meet all the
relevant requirements of the
IRB
framework.
(c)
In order for banks to use the IAA, their
supervisors must be satisfied (i) that
the
ECAI
meets the ECAI eligibility criteria outlined in
paragraphs 90 to 108 and (ii)
with
the
ECAI rating methodologies used in the process.
In
addition, banks have the responsibility to
demonstrate to the satisfaction of their
supervisors how these internal assessments
correspond with the relevant ECAI’s
standards.
For
instance, when calculating the credit
enhancement level in the context of
the
IAA,
supervisors may, if warranted, disallow on a
full or partial basis any
sellerprovided
recourse
guarantees or excess spread, or any other first
loss credit enhancements that provide limited
protection to the bank.
(d)
The bank’s internal assessment process must
identify gradations of risk.
Internal
assessments
must correspond to the external ratings of ECAIs
so that supervisors
can
determine which internal assessment corresponds
to each external rating
category
of the ECAIs.
(e)
The bank’s internal assessment process,
particularly the stress factors
for
determining
credit enhancement requirements, must be at
least as conservative as
the
publicly available rating criteria of the major
ECAIs that are externally rating
the
ABCP
programme’s commercial paper for the asset type
being purchased by the
programme.
However, banks should consider, to some extent,
all publicly available
ECAI
ratings methodologies in developing their
internal assessments.
•
In the case where (i) the commercial paper
issued by an ABCP programme is
externally
rated by two or more ECAIs and (ii) the
different ECAIs’ benchmark
stress
factors
require different levels of credit enhancement
to achieve the same external
rating
equivalent, the bank must apply the ECAI stress
factor that requires the most
conservative
or highest level of credit protection. For
example, if one ECAI required
enhancement
of 2.5 to 3.5 times historical losses for an
asset type to obtain a single
A
rating equivalent and another required 2 to 3
times historical losses, the
bank
must
use the higher range of stress factors in
determining the appropriate level
of
seller-provided
credit enhancement.
•
When selecting ECAIs to externally rate an ABCP,
a bank must not choose only
those
ECAIs that generally have relatively less
restrictive rating methodologies.
In
addition,
if there are changes in the methodology of one
of the selected ECAIs,
including
the stress factors, that adversely affect the
external rating of the
programme’s
commercial paper, then the revised rating
methodology must be
considered
in evaluating whether the internal assessments
assigned to ABCP
programme
exposures are in need of
revision.
• A
bank cannot utilise an ECAI’s rating methodology
to derive an internal
assessment
if the ECAI’s process or rating criteria is not
publicly available.
However,
banks should consider the non-publicly available
methodology — to the
extent
that they have access to such information ─ in
developing their internal
assessments,
particularly if it is more conservative than the
publicly available
criteria.
•
In general, if the ECAI rating methodologies for
an asset or exposure are not
publicly
available, then the IAA may not be used.
However, in certain instances,
for
example,
for new or uniquely structured transactions,
which are not currently
addressed
by the rating criteria of an ECAI rating the
programme’s commercial
paper,
a bank may discuss the specific transaction with
its supervisor to determine
whether
the IAA may be applied to the related
exposures.
(f)
Internal or external auditors, an ECAI, or the
bank’s internal credit review or
risk
management
function must perform regular reviews of the
internal assessment
process
and assess the validity of those internal
assessments. If the bank’s
internal
audit,
credit review, or risk management functions
perform the reviews of the
internal
assessment process, then these functions must be
independent of the
ABCP
programme business line, as well as the
underlying customer
relationships.
(g)
The bank must track the performance of its
internal assessments over time
to
evaluate
the performance of the assigned internal
assessments and make
adjustments,
as necessary, to its assessment process when the
performance of the
exposures
routinely diverges from the assigned internal
assessments on those
exposures.
(h)
The ABCP programme must have credit and
investment guidelines, i.e.
underwriting
standards,
for the ABCP programme. In the consideration of
an asset purchase, the
ABCP
programme (i.e. the programme administrator)
should develop an outline of
the
structure of the purchase transaction. Factors
that should be discussed
include
the
type of asset being purchased; type and monetary
value of the exposures
arising
from the provision of liquidity facilities and
credit enhancements; loss
waterfall;
and legal and economic isolation of the
transferred assets from the
entity
selling
the assets.
(i)
A credit analysis of the asset seller’s risk
profile must be performed and
should
consider,
for example, past and expected future financial
performance; current
market
position; expected future competitiveness;
leverage, cash flow, and
interest
coverage;
and debt rating. In addition, a review of the
seller’s underwriting
standards,
servicing capabilities, and collection processes
should be performed.
(j)
The ABCP programme’s underwriting policy must
establish minimum asset
eligibility
criteria
that, among other things,
•
exclude the purchase of assets that are
significantly past due or
defaulted;
•
limit excess concentration to individual obligor
or geographic area; and
•
limit the tenor of the assets to be
purchased.
(k)
The ABCP programme should have collections
processes established that
consider
the
operational capability and credit quality of the
servicer. The programme should
mitigate
to the extent possible seller/servicer risk
through various methods, such
as
triggers
based on current credit quality that would
preclude co-mingling of funds
and
impose
lockbox arrangements that would help ensure the
continuity of payments to
the
ABCP programme.
(l)
The aggregate estimate of loss on an asset pool
that the ABCP programme is
considering
purchasing must consider all sources of
potential risk, such as credit
and
dilution risk. If the seller-provided credit
enhancement is sized based on
only
credit-related
losses, then a separate reserve should be
established for dilution risk,
if
dilution risk is material for the particular
exposure pool. In addition, in sizing
the
required
enhancement level, the bank should review
several years of historical
information,
including losses, delinquencies, dilutions, and
the turnover rate of the
receivables.
Furthermore, the bank should evaluate the
characteristics of the
underlying
asset pool, e.g. weighted average credit score,
identify any
concentrations
to an individual obligor or geographic region,
and the granularity of
the
asset pool.
(m)
The ABCP programme must incorporate structural
features into the purchase of
assets
in order to mitigate potential credit
deterioration of the underlying
portfolio.
Such
features may include wind down triggers specific
to a pool of exposures.
621.
The notional amount of the securitisation
exposure to the ABCP programme
must
be
assigned to the risk weight in the RBA
appropriate to the credit rating equivalent
assigned to the bank’s
exposure.
622.
If a bank’s internal assessment process is no
longer considered adequate, the
bank’s
supervisor may preclude the bank from applying
the internal assessment approach
to
its
ABCP exposures, both existing and newly
originated, for determining the
appropriate
capital
treatment until the bank has remedied the
deficiencies. In this instance, the bank must
revert to the SF or, if not available, to the
method described in paragraph
639.
(vi)
Supervisory Formula (SF)
623.
As in the IRB approaches, risk-weighted assets
generated through the use of the
SF
are
calculated by multiplying the capital charge by
12.5. Under the SF, the capital charge
for
a
securitisation tranche depends on five
bank-supplied inputs: the IRB capital charge had
the
underlying exposures not been securitised
(KIRB);
the
tranche’s credit enhancement level
(L)
and thickness (T); the pool’s effective number
of exposures (N); and the pool’s
exposureweighted average
loss-given-default (LGD). The inputs
KIRB, L, T and N are
defined below.
The
capital charge is calculated as
follows:
(1) Tranche’s IRB capital
charge = the amount of exposures that have been
securitised
times
the greater of (a)
0.0056 x T, or (b) (S [L+T] – S
[L]),
where
the function S[.] (termed the ‘Supervisory
Formula’) is defined in the
following
paragraph.
When the bank holds only a proportional interest
in the tranche, that
position’s
capital charge equals the prorated share of the
capital charge for the
entire
tranche.
624.
The Supervisory Formula is given by the
following expression:
where
625.
In these expressions, Beta[L; a, b] refers to
the cumulative beta distribution
with
parameters a and b
evaluated at L.
(96)
(96)
The cumulative beta distribution function is
available, for example, in Excel as the function
BETADIST.
626.
The supervisory-determined parameters in the
above expressions are as
follows:
τ
= 1000, and ω =
20
Definition of
KIRB
627.
KIRB
is
the ratio of (a) the IRB capital requirement
including the EL portion for
the
underlying
exposures in the pool to (b) the exposure amount
of the pool (e.g. the sum of
drawn
amounts related to securitised exposures plus
the EAD associated with undrawn
commitments
related to securitised exposures).
Quantity
(a) above must be calculated in accordance with
the applicable minimum IRB standards (as set out
in Section III of this document) as if the
exposures in the pool were held directly by the
bank. This calculation should reflect the
effects of any credit risk mitigant that is
applied on the underlying exposures (either
individually or to the entire pool), and hence
benefits all of the securitisation
exposures. KIRB
is
expressed in decimal form (e.g. a capital charge
equal to
15% of the pool would be expressed as 0.15).
For
structures involving an SPE, all the assets of
the SPE that are related to the securitisations
are to be treated as exposures in the pool,
including assets in which the SPE may have
invested a reserve account, such as a cash
collateral account.
628.
If the risk weight resulting from the SF is
1250%, banks must deduct the securitisation
exposure subject to that risk weight in
accordance with paragraphs 561 to
563.
629.
In cases where a bank has set aside a specific
provision or has a
non-refundable
purchase
price discount on an exposure in the pool,
quantity
(a)
defined above and quantity
(b)
also defined above must be calculated using the
gross amount of the exposure
without
the
specific provision and/or non-refundable
purchase price discount. In this case,
the
amount
of the non-refundable purchase price discount on
a defaulted asset or the
specific
provision
can be used to reduce the amount of any
deduction from capital associated
with
the
securitisation exposure.
Credit
enhancement level (L)
630.
L is measured (in decimal form) as the ratio of
(a) the amount of all
securitisation
exposures
subordinate to the tranche in question to (b)
the amount of exposures in the
pool.
Banks
will be required to determine L before
considering the effects of any
tranche-specific
credit
enhancements, such as third-party guarantees
that benefit only a single tranche.
Any
gain-on-sale
and/or credit enhancing I/Os associated with the
securitisation are not to be
included
in the measurement of L.
The
size of interest rate or currency swaps that are
more junior than the tranche in question may be
measured at their current values (without the
potential future exposures) in calculating the
enhancement level. If the current value of the
instrument cannot be measured, the instrument
should be ignored in the calculation of L.
631.
If there is any reserve account funded by
accumulated cash flows from the
underlying
exposures that is more junior than the tranche
in question, this can be included in the
calculation of L. Unfunded reserve accounts may
not be included if they are to be funded from
future receipts from the underlying
exposures.
Thickness
of exposure (T)
632.
T is measured as the ratio of (a) the nominal
size of the tranche of interest to (b)
the
notional
amount of exposures in the pool. In the case of
an exposure arising from an
interest
rate
or currency swap, the bank must incorporate
potential future exposure. If the
current
value
of the instrument is non-negative, the exposure
size should be measured by the
current
value plus the add-on as in the 1988 Accord. If
the current value is negative,
the
exposure
should be measured by using the potential future
exposure only.
Effective
number of exposures (N)
633.
The effective number of exposures is calculated
as:
where
EADi
represents the
exposure-at-default associated with the
ith instrument in the
pool.
Multiple
exposures to the same obligor must be
consolidated (i.e. treated as a
single
instrument).
In the case of re-securitisation (securitisation
of securitisation exposures),
the
formula
applies to the number of securitisation
exposures in the pool and not the number
of
underlying
exposures in the original pools. If the
portfolio share associated with the
largest
exposure,
C1, is available, the bank may compute N as
1/C1.
Exposure-weighted
average LGD
634.
The exposure-weighted average LGD is calculated
as follows:
where
LGDi
represents the
average LGD associated with all exposures to the
ith obligor.
In
the
case of re-securitisation, an LGD of 100% must
be assumed for the underlying securitised
exposures.
When
default and dilution risks for purchased
receivables are treated in an aggregate manner
(e.g. a single reserve or over-collateralisation
is available to cover losses from either source)
within a securitisation, the LGD input must be
constructed as a weighted-average of the LGD for
default risk and the 100% LGD for dilution risk.
The
weights are the stand-alone IRB capital charges
for default risk and dilution risk,
respectively.
Simplified
method for computing N and
LGD
635.
For securitisations involving retail exposures,
subject to supervisory review, the
SF
may
be implemented using the simplifications: h = 0
and v = 0.
636.
Under the conditions provided below, banks may
employ a simplified method for
calculating
the effective number of exposures and the
exposure-weighted average LGD.
Let
Cm
in
the simplified calculation denote the share of
the pool corresponding to the sum of
the
largest
‘m’ exposures (e.g. a 15% share corresponds to a
value of 0.15). The level of m is
set
by
each bank.
•
If the portfolio share associated with
the largest exposure, C1, is no more than
0.03
(or
3% of the underlying pool), then for purposes of
the SF, the bank may set
LGD=0.50
and N equal to the following
amount
•
Alternatively, if only C1 is available and this
amount is no more than 0.03, then
the
bank may set LGD=0.50
and N=1/ C1.
(vii)
Liquidity facilities
637.
Liquidity facilities are treated as any other
securitisation exposure and receive
a
CCF
of 100% unless specified differently in
paragraphs 638 to 641. If the facility is
externally
rated,
the bank may rely on the external rating under
the RBA. If the facility is not rated
and
an
inferred rating is not available, the bank must
apply the SF, unless the IAA can
be
applied.
638.
An eligible liquidity facility that can only be
drawn in the event of a general
market
disruption
as defined in paragraph 580 is assigned a 20%
CCF under the SF. That is, an
IRB
bank
is to recognise 20% of the capital charge
generated under the SF for the facility. If
the
eligible
facility is externally rated, the bank may rely
on the external rating under the
RBA
provided
it assigns a 100% CCF rather than a 20% CCF to
the facility.
639.
When it is not practical for the bank to use
either the bottom-up approach or the
topdown approach for
calculating KIRB, the bank may, on an
exceptional basis and subject to
supervisory consent, temporarily be allowed to
apply the following method. If the
liquidity
facility
meets the definition in paragraph 578 or 580,
the highest risk weight assigned
under
the
standardised approach to any of the underlying
individual exposures covered by
the
liquidity
facility can be applied to the liquidity
facility.
If
the liquidity facility meets the definition in
paragraph 578, the CCF must be 50% for a
facility with an original maturity of one year
or less, or 100% if the facility has an original
maturity of more than one year. If the liquidity
facility meets the definition in paragraph 580,
the CCF must be 20%. In all other cases, the
notional amount of the liquidity facility must
deducted.
(viii)
Treatment of overlapping
exposures
640.
Overlapping exposures are treated as described
in paragraph 581.
(ix)
Eligible servicer cash advance
facilities
641.
Eligible servicer cash advance facilities are
treated as specified in paragraph
582.
(x)
Treatment of credit risk mitigation for
securitisation exposures
642.
As with the RBA, banks are required to apply the
CRM techniques as specified in
the
foundation IRB approach of Section III when
applying the SF. The bank may reduce
the
capital
charge proportionally when the credit risk
mitigant covers first losses or losses on
a
proportional
basis. For all other cases, the bank must assume
that the credit risk mitigant
covers
the most senior portion of the securitisation
exposure (i.e. that the most junior
portion
of
the securitisation exposure is uncovered).
Examples for recognising collateral
and
guarantees
under the SF are provided in Annex
5.
(xi)
Capital requirement for early amortisation
provisions
643.
An originating bank must use the methodology and
treatment described in
paragraphs
590 to 605 for determining if any capital must
be held against the investors’
interest.
For banks using the IRB approach to
securitisation, investors’ interest is defined
as
investors’
drawn balances related to securitisation
exposures and EAD associated
with
investors’
undrawn lines related to securitisation
exposures.
For
determining the EAD, the undrawn balances of
securitised exposures would be allocated between
the seller’s and investors’ interests on a pro
rata basis, based on the proportions of the
seller’s and investors’ shares of the
securitised drawn balances. For IRB purposes,
the capital charge attributed to the investors’
interest is determined by the product of (a) the
investors’ interest, (b) the appropriate CCF, and
(c) KIRB.
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