Full paper available here.
Georges Duponcheele, William Perraudin, and Daniel Totouom-Tangho
This paper proposes a variant of the Arbitrage Free Approach (AFA) (developed by Duponcheele et al. (2013)) applicable when the available inputs are risk weights alone. This Simplified AFA, together with the AFA itself, offer a consistent set of approaches for regulatory capital calculations that can be used by investor or issuer banks without relying on agency ratings. The consistency of teh AFA and SAFA has the significant advantage of eliminating the cliff effects that occur with the Modified Supervisory Formula Approach (MSFA) and the Simplified Supervisory Formula Approach (SSFA) recently suggested by the Basel Committee. The latter are based on different assumptions and so may imply quite different capital for a given securitisation tranche.