Full paper available here.
Georges Duponcheele, William Perraudin, and Daniel Totouom-Tangho
This paper develops a principles-based approach to calculating regulatory capital for securitisations. The approach is simpler and more transparent than the Basel Committee’s proposed Modified Supervisory Formula Approach (MSFA) and avoids the latter’s numerous opaque approximations. Importantly, our proposed approach is directly consistent with the Basel II Internal Ratings-Based Approach (IRBA) capital formulae for on-balance sheet loans. It is therefore “capital neutral” (at least, before model risk charges or other add-ons) in that a bank holding all the tranches of a securitisation will face the same capital charge as if it retains the securitisation pool assets as directly held exposures. Our suggested approach is therefore, less likely to encourage capital arbitrage.