Maturity Effects in Securitisation Capital: Total Capital Levels and Dispersion Across Tranches

Full paper available here.

Georges Duponcheele, William Perraudin, and Daniel Totouom-Tangho

This paper examines how the capital required for securitisation tranche exposures varies as the maturity of the securitisation increases. We investigate for different maturities the appropriate capital for (i) loan pools, (ii) securitisation deals as a whole (i.e., all the tranches within a given deal), and (iii) individual tranches of differing seniority.

This issue is highly topical because the Basel Committee’s recent proposals on regulatory capital for securitisations include an expected loss component that is highly sensitive to maturity. An alternative proposal, the Arbitrage Free Approach (AFA), advanced by the industry (see Duponcheele et al (2013)) builds maturity effects into the capital formulae in a very different way.