Key findings
- • •
Agenda
1.Background for the European Commission’s Proposals 2.Our Comments on the European Commission’s Proposals 3.Our Comments on the Luxembourg Presidency Compromise 4.Conclusion 5.Appendix different market players (investors, originators, banks, MMF and insurers…) and different aspects of the regulation (regulatory capital, liquidity, UCITS…) Theregulatoryframeworkshouldbesuitedforthemarketitisfocusingon,i.e.wemust acknowledgethatEuropehasatransitiontoadapto,adifferentpracticeandframework andthathemarkethasdeliveredverydifferentresultsfromthegeneralperceptionof whatsecuritisation hasdone. While a form of unicity or reciprocity could be observed, the convergence with Basel can’t be a goal in itself… Regulatory consistency across the regulations applicable to: awhichismostlydrivenbymacro-economicdemandorneedforfunding/refinancing conditions (growth rate… long been subdued in Europe), a witheinterventionortheback-upofalastresort“lender”(largelyminimumofliquidity addressedthankstotheABSPP,CBPPbearinginmindthatoomuchliquiditysupportis also impairing the re-start of the market) and a(capital,liquidity,investmentpolicy…)withanholisticviewofthereasonableregulation market and its stakeholders.Two key ideas should drive the regulatory process: What is needed for the Revival of the European Securitisation Market? To work properly at a macro level, the market needs the combination of: three ingredients
Resilient performance of European securitisations Overall European Structured Finance cumulative default rate since mid-2007 of 1.6%, far below US value of 19.3% Actual performance… better than assumed and misrepresented!
U.S. 19.30 Overall
0.07 ABS 1.58% Overall Europe: 0.10 CLOs …but are bearing the brunt of the Basel regulation 0.14 RMBS
0.55 SMEs
2.88 CDO European assets did not cause the financial crisis… Synthetic CDO of RMBS, SMEs and ABS are the 3 main “real economy” assets classes in Europe, with little or no losses Source: S&P. Data from Mid-2007 to Mid-2014 by original issuance volume, for all tranches and levels of seniority European Structured Finance cumulative default rate since mid-2007 (S&P)
The European Securitisation Market: Track Record
assets are covered by government agencies (Fannie Mae, Freddie Mac, Sally Mae, SBA) US-specific legislation (not Basel). Already implemented the G20 non-reliance of ratings. US Congress removed ratings as inputs for capital requirements US Securitisation Market: € 11.3 trn since 2007 ~80% of underlying 15% of assets covered by
18 16 2015Q1
1,070 78 138 2014 Europe - Placed Europe - Retained USA
1,512 76 105 2013
1,550 86 166 2012 (1): Value obtained by removing Denmark, UK, Other Europe and Multinational issuances from the total European issuance (AFME data) 1,014 89 287 2011
1,277 90 289 2010
1,359 Sources: AFME, BNP Paribas. Data as of Q1 2015 underlying assets impacted by securitisation legislation to entire segments of the economy (SMEs in Europe in particular) and the presence of ratings in the regulation plays an active role against an effective Capital Markets Union in Europe
EU and US: Different Market Structures, Different Regulations European and US securitisation issuance
500 European Securitisation Market: € 3.3 trn since 2007 No government agencies guaranteeing securitisation backed by “high quality” assets. 100% of the European regulation applies rigorously old ratings-dependent Basel rules which are highly detrimental
UK Netherlands Spain Italy Belgium France Germany Ireland Portugal Greece Others Netherlands
€bn 170
36 69 3624123 70 70 Total: € 1,366 bn Source: AFME. Data as of Q1 2015 Breakdown by country of assets ndSME was pre-crisis the 2 most important asset class position)th(now in the 4 Why? Germany How? RMBS ABS CDO SME CMBS WBS/PFI can be revived There is little link between 811 issuance and country GDP the securitisation market, if it There is untapped potential for €Total: 1,366 bn Source: AFME. Data as of Q1 2015
Overview of European Securitisation Outstanding Volumes Breakdown by asset class
Belgium x4
UK x2
Germany x4
Netherlands x2 Italy x6
Spain x7 Country breakdown of capital increase in the European banking system when SME retail pools are securitised Source: EBA Discussion Paper on Simple, Standard and Transparent Securitisations (October 2014) Very large capital multiplier (after/before securitisation) when the risk of the pool (expressed by its capital requirement) is ignored and replaced with opinions of rating agencies
Why? European Regulators Know about the Problem that Ratings Create…
SMEs RMBS Autos of June 2015thSource: EBA technical advice on Qualifying Securitisations, 26 (Asset class highlights in red by BNP Paribas, based on EBA October 2014 data) The Basel securitisation calibration is known for its absence of transparency, but the EBA is at least transparent in its advice to the European Commission on the effect of implementing the future Basel rules, even “rescaled” for Simple, Transparent and Standard securitisation
…but do not have the Political Mandate to Depart from Basel
Capital Multiplier for Italian retail SME: with RBA (current rules), x6 with ERBA (future Basel 2018 rules),x7 with ERBA, rescaled (EBA recalibration of future Basel rules)x6
European European European the hierarchy Commission, was expected with No revival of the without changes to It is vital for the head-on this issue Basel rescaled rules securitisation market the June 2015 EBA’s Member States and Parliament to tackle
70% 90% 120% 140% 160% 180% 210% 260% 310% 420% 580% 760% 860% 950% 1050% 1130% 1250% 1250% Non-STS 5y 50% 55% 75% 90% 105% 120% 140% 185% 220% 300% 440% 580% 650% 800% 880% 950% 1250% 1250% STS
15% 15% 30% 40% 60% 80% 120% 170% 220% 330% 470% 620% 750% 900% 1050% 1130% 1250% 1250% Non-STS 1y Non-senior (thin) tranche STS 15% 15% 20% 25% 40% 55% 80% 120% 155% 235% 355% 470% 570% 755% 880% 950% 1250% 1250%
20% 30% 40% 45% 50% 65% 70% 90% 105% 140% 160% 180% 225% 280% 340% 420% 505% 1250% Non-STS 5y STS 15% 20% 25% 30% 35% 45% 45% 65% 75% 100% 120% 135% 170% 235% 285% 355% 430% 1250% Senior tranche 15% 15% 25% 30% 40% 50% 60% 75% 90% 120% 140% 160% 200% 250% 310% 380% 460% 1250% Non-STS 1y STS 10% 10% 15% 20% 25% 35% 40% 55% 65% 85% 105% 120% 150% 210% 260% 320% 395% 1250% Capital surcharge: = % × 100% Capital surcharge: = max0.3, % × (*) Assuming mapping is redefined for ERBA The EBA calibration exercise was an approx. 30% (ERBA) to 50% (SSFA) rescaling of the problematic Basel 3 rules, rather than a simplification of the rules addressing the technical problems (see Appendix) Convergence with Basel seemed to be higher priority than designing a dedicated set of rules adapted to the European economy, particularly apparent with the absence of changes to the Basel hierarchy
STS: a Basel rescaling exercise… rather than adapting the rules[1][2]
in the US SEC-SA SEC-ERBA Future Basel 3 SEC-IRBA The US already has, and will have a competitive advantage: thanks to US Congress, they do not apply ERBA hierarchy applied •Surcharge between 30% and 150% (favours subprime pool) •In practice, major US banks only •In practice, almost all US banks, bar the major ones •100% surcharge (notwithstanding a future US Congress amendment)
in Europe SEC-SA SEC-IRBA Future Basel 3 •Surcharge between 30% and 150% (penalises high quality pool) •In practice, IRB originators / sponsors only SEC-ERBA •Out-of-control surcharge between 0% and 700% •In practice, almost all European banks •100% surcharge •In practice, almost no European banks will reach this stage a rating to calculate capital! hierarchy applied This should be in last position, for complex structures that need
SFA Ratings External SEC-SA (RBA or RB-SA) applied in the US •About 10% surcharge, •Major US banks only •Use of IRB proxies authorised in the US •50% surcharge •Almost all US banks, bar the major ones Current hierarchy
SFA Ratings External The most problematic feature for Europe of future Basel capital rules: the hierarchy of approaches with reinforcement of the roles of external ratings
Agenda
1.Background for the European Commission’s Proposals 2.Our Comments on the European Commission’s Proposals 3.Our Comments on the Luxembourg Presidency Compromise 4.Conclusion 5.Appendix
Summary Comments
September thCommission’s 30Capital Markets Action Plan included proposals aimed at reviving the European securitisation market Our October paper commented on the proposals and argued that they contained flaws that were likely to vitiate the effort to restore the market In particular, (i) the hierarchy of approaches and (ii) obstacles preventing use of the SEC-IRBA meant that the dominant approach would remain the SEC-ERBA While the EBA’s suggested recalibration of the SEC-IRBA and SEC-SA for reasonably effective, the SEC-ERBA remained STS securitisations was much too conservative especially for southern European and SME-backed transactions
• • • •
Obstacles preventing use of the SEC-IRBA
To use the SEC-IRBA, IRB banks would need to have approved credit policies and models in place to calculate K (either on a top-down or bottom-up basis)IRB For retail pools, IRB banks have typically approved policies only for the products and countries where they act as originators In addition, the information required under such policies is only available to the originator So, it is difficult to see how IRB banks can calculate K on securitisation pools when IRBacting as investors, for example, in securitisations originated by another bank in another European country purchased receivables policy approved Even in the case where IRB banks have a allowing the use of the top-down approach on pools they have not originated, there is currently very little clarity about the burden of effort that would be required to satisfy the CRR Article 184 under Chapter 3requirements specified in Given these major obstacles, it seems unlikely, without further changes, that the SEC- IRBA will be accessible to most European banks and that the SEC-ERBA would remain the dominant approach
• • • • • •
If regulators wish to expand the use of the purchased receivables approach, they must provide explicit assurance that, in this application, banks may dispense with most of the conditions of use of the approach described in Article 184 Such explicit assurances could take the form of a new paragraph in Article 255 of the Commission’s proposals together with new technical standards from the EBA This might be feasible thanks to the regulatory PD/LGD data posted in the European Data Warehouse (EDW) by originating banks This would allow investors to have access to a minimum of 5 years (for retail exposures) to 7 years (for non-retail exposures) of performance data that may allow IRB banks to check the calculation of the IRB risk parameters
Use of the SEC-IRBA: What Should Be Done?
Banks could be permitted to employ risk parameters supplied by other IRB banks acting as originators, so long as those IRB banks satisfied the common IRB standards stipulated in the CRR European regulators could allow the general use of the top-down approach as a way to derive K for securitisation poolsIRB To broaden the use of the SEC-IRBA in Europe, two steps could be taken: 1. 2.
The Hierarchy
If the SEC-IRBA remains largely inaccessible to European banks acting as securitisation investors, the conservatism of the SEC-ERBA can only be mitigated by altering the hierarchy of approaches September proposals contained the striking thintroduction of a The 30 derogation in Article 254, paragraph 3, permitting use of the SEC-SA above the SEC-ERBA if all the positions a bank holds in a securitisation generate a capital requirement under SEC-ERBA that is “not commensurate to the credit risk embedded in the exposures underlying the securitisation” The introduction of this provision is an important step in that it demonstrates that policy-makers take seriously some of the flaws in agency ratings when applied to European pools, notably sovereign rating caps and conservatism when applied to particular asset classes such as SME loans not defined and the “burden of But the terms “not commensurate” were proof” to demonstrate this remained with the banks To make the provision effective, we argued that a clarification of what is crucialmeant by “not commensurate” was
• • • • •
Our Suggestion on the Hierarchy
We argued for a straightforwardreversal of the positions of the SEC-ERBA and the SEC-SA in the hierarchy The SEC-SA is risk sensitive because the attachment and detachment points adjust as defaults accumulate in the pool and is reasonably consistent with the SEC-IRBA Raising the SEC-SA in the hierarchy would, hence, make the capital more coherentreatment of IRB banks This approach would restore the level playing field in Europe between IRB and SA banks which would potentially have market liquidity and efficiency benefits level playing field between US banks using the It would also partly restore a SEC-IRBA and European banks using the SEC-SA
• • • • •
Agenda
1.Background for the European Commission’s Proposals 2.Our Comments on the European Commission’s Proposals 3.Our Comments on the Luxembourg Presidency Compromise 4.Conclusion 5.Appendix
Will New Rules Achieve Intended Goals?
More public transactions instead of retained ones? More investors? Better funding spreads? More SRT with new rules? More asset sales financed through securitisation with new rules?
Findings from new/old rules impact study Will the new rules enable revival of the public securitisation market for funding securitisation pools? Will the new rules enable banks to free capital to lend more?
1. 2. 3.
General increase under new rules more pronounced under the ratings- based approach especially for countries where AAA is not achievable Ratings overestimating senior tranche risk especially in peripherals
• •
Senior Tranche Risk Weight Comparisons
Average risk weights for 550 senior tranches in different asset class based on different risk weight calculation approaches
The increase compared to current framework is more pronounced for the formula-based approaches than for the rating-based one The STS SEC-ERBA calibration broadly maintains capital requirements at the same level as the current RBA
• •
Mezzanine Tranche Risk Weight Comparisons
Average risk weights for 944 mezzanine tranches in different asset class based on different risk weight calculation approaches
The increase compared to current framework is more pronounced for the formula-based approaches
Junior Tranches Risk Weight Comparisons
Average risk weights for 278 junior tranches in different asset class based on different risk weight calculation approaches
Hierarchy Inversion Under the New Proposals
: Flexibility to use the lower of Senior SEC-ERBA and SEC-SA (even with a margin of 25%) could lead to a systematic inversion of the hierarchy with SEC SA being used instead of SEC-ERBA. The STS designation results in a massive 50% capital reduction for senior tranches : the inversion of the Mezzanine hierarchy would be more on a case by case basis : the SEC-ERBA would Junior remain the main approach as it systematically results in lower Risk Weights than the SEC-SA
• • •
Luxembourg Compromise on IRBA Use
internal credit policy and models for calculating KIRB for securitisations; use of different risk factors on the underlying pool to estimate PD and LGD; and due diligence requirements to monitor the actions and policies of receivables sellers.
a) b) c) EBA shall develop draft regulatory standards to specify in greater detail the conditions to allow institutions to calculate K for the underlying pools of IRBsecuritisation in accordance with paragraph 4, in particular with regard to: EBA shall submit those draft regulatory standards to the Commission by [one year] after entry into force of this Regulation Power is delegated to the Commission to adopt the regulatory technical standards referred to this paragraph in accordance with the procedure laid down in Articles 10 to 14 of Regulation (EU) No 1095/2010 Extract from Compromise • • •
Will IRB banks be allowed to use SEC-IRBA as investors? Derogation to use the SEC-SA for investors instead of SEC-ERBA is welcome but STS condition too restrictive Comments • •
No improvement for issuers Higher capital for bank investors Overall cap is beneficial for issuers. Higher capital would be less detrimental if bank investors can use formula approach Future Capital Rules • • • •
Cheaper funding options through Covered Bonds and ECB Securitisation is currently a marginal tool Cheaper funding options and retained deals less costly in capital than placed deals
Crucial that bank investors can use formula approach SEC-IRBA or SEC-SA instead of SEC-ERBA
Current Capital Rules • • •
Revival of Public Placement for Funding Pools?
Bank type IRB STANDARD
Change of formula negative Harmonisation positive (Article 254 2c) Will regulators allow deals with no ratings? Impact of revision of SA RW? Comments • • • •
SEC-IRBA penalising as more capital surcharge makes capital relief more costly to achieve ERBA approach No transaction done in Europe except if SEC-SA used for non rated tranches Future SRT Rules • • •
SRT will remain marginal tool
Freeing up Capital through SRT
SFA≈20 transactions p.a. in Europe RBA approach No transaction done in Europe Current SRT Rules • • • •
Bank type IRB STANDARD
Change of formula negative Widening use of SEC-IRBA positive (Article 255 9) Massive competitive advantage for US banks Comments • • •
ERBA Potential widening usage of SEC- IRBA not happening before 2017 at best SEC-IRBA not implemented before at least 2018 Future Capital Rules • • •
RBA Few banks allowed to use SFA for non- originated assets (need to have IRB purchase receivables policy approved) SFA on non- originated assets using the proxy approach
European bank deleveraging financed by US banks in the absence of a level playing field
Current Capital Rules • • •
Freeing up Capital trough Asset Sales?
Warehouse Bank type European IRB US IRB
Key Issues and Solutions (1/2)
An Adjustment Factor ought to be introduced in the formula (see Appendix) Tranche maturity should be replaced by Pool Weighted Average Life in the framework SEC-SA does not have this effect. The STS SEC-IRBA should be simplified to remove this effect The reasons in article 258, paragraph 2, are also valid for limiting the use of SEC-SA. (This is another reason why SEC-SA should be above SEC-ERBA, with SEC-ERBA as fall-back position, instead of the 1250% RW penalty)
The requirement of appears conservative, when in 1250% RW up to Pool Capital fact it is a source of regulatory capital arbitrage opportunity as currently defined and used in SEC-IRBA and SEC-ERBA is Tranche Maturity, not a relevant risk factor for tranche credit loss. Pool Weighted Average Life is. Furthermore, tranche maturity has anti-European features. SEC-SA does not contain this incorrect parameter SEC-IRBA contains a : the coefficient “C” in Reward for Poor Asset Performance the p-formula is negative Conditions of use of the formula SEC-IRBA should be extended to SEC-SA
• • • •
Key Issues and Solutions (2/2)
SEC-IRBA needs to be allowed for IRB banks on non-originated pools with an adapted framework for banks acting as sponsors or investors Need to broaden this derogation to non-STS tranches that are “senior enough”. This can be defined as tranches with a risk weight from the SEC-SA not exceeding a threshold (e.g. 25% as proposed in 254 -3) and also an attachment point at origination being at least a certain multiple of the pool capital (e.g. 3 or 4 times) Should be brought back to closing date Sanctions should only be triggered in cases of “bad faith” failures
Securitisation IRB is very restricted in Europe, and will remain so with SEC- IRB European banks are at a competitive disadvantage compared to US IRBA. banks with the Derogation to use the SEC-SA instead of SEC-ERBA is too restrictive STS requirement on senior tranches (Article 5): disclosing transaction Transparency rule for all transactions documents at pricing stage is not in line with current market practises (Articles 16 to 19) are not only on the legal Sanctions for getting STS wrong entity but also on individuals with fines up to Euro 5m and criminal punishments
• • • •
Agenda
1.Background for the European Commission’s Proposals 2.Our Comments on the European Commission’s Proposals 3.Our Comments on the Luxembourg Presidency Compromise 4.Conclusion 5.Appendix
Conclusion
fear of potential sanctions capital requirements compared to the current framework Use of STS remains highly uncertain given complexity of implementation and The European securitisation market as a whole will see a general increase in Capital benefit for STS in itself is not sufficient to revive the market Wider usage of the SEC-IRBA for IRB banksWider usage of the SEC-SA for SA banks Harmonisation and greater flexibility in SRT rulesAllowing standard banks to use the SEC-SA for SRT STS is perceived by regulators as the key to revive the market. However: In order to achieve the stated goal of reviving the market what is needed is not only STS but also a more general use of formulas for capital: In order to achieve the stated goal of freeing capital to enable more lending, what is needed is:
• • •
Agenda
1.Background for the European Commission’s Proposals 2.Our Comments on the European Commission’s Proposals 3.Our Comments on the Luxembourg Presidency Compromise 4.Conclusion 5.Appendix
Appendix
SEC-IRBA and SEC-SA explained SSFA explained SEC-ERBA explained
• • •
1.Explanations of the Issues with the Basel III approaches 2.After Basel III: building capital rules that make sense
%The Tranche Maturity () is a notion used in trading books, not banking books for which this regulation is designed. The risk driver is %Asset Maturity () . The “switch” from to is a flawed financial concept. The definition of Tranche Maturity in Article 257 is Anti-European, as it generates long maturities based on the length of the legal process in a given jurisdiction. It favours the UK. It is damaging for Italy and %Portugal, where will almost always be at 5 years.The difference in calibration of E in Article 259 (1) between the Wholesale framework (7% surcharge per year) and the Retail framework (27% surcharge per year) cannot be explained. For example, SME retail will be heavily penalised compared to SME wholesale. Article 257 and Article 259 (1): The badly calibrated anti-European component 1) 2) 3) Article 259 (1): The coefficient D is positive, and increases the surcharge as the average loss given default of the pool increases. This is how it should be. Article 259 (1): The coefficient A is an adjustment so that the Basel RSW can “target” an average value of , once B, C, D and E have been taken into account. Article 259(1) for Non-STS and Article 260 for STS: )For STS, the coefficient is set explicitly at 0.5. Its effect is to divide by 2 the surcharge calculated by . For Non-STS, this value is implicitly equal to 1.0. This is how it should be, with STS capital surcharges to be less than Non-STS ones.
SEC-IRBA Explained
Article 255 (3) (b): IRB pool capital before securitisationThis item is the Unexpected Losses (UL) of the pool, i.e. the . For IRB banks, this value depends on the characteristics of the assets in the pool which are: Probability of Default (PD), *%Loss Given Default (LGD), their systemic asset correlation () and Asset Maturity (). Article 255 (3) (a): This item is the Expected Losses (EL) of the pool, including defaulted exposures. The addition of Expected Losses transform the pool capital from Unexpected Loss to Marginal Value at Risk (MVaR). This is an important step to allocate capital to securitisation tranches. The inclusion of defaulted exposures is a welcome clarification to harmonise practices. + " × + # × $# + × %! Article 259 (1): The Poor Performance reward component The coefficient C was made by the Basel RSW to be negative: this means that a pool of poor credit quality (such as subprime) with a higher value of K will have a lower capital IRBsurcharge than a good credit quality pool. This is not prudent. Article 259 (1): The coefficient B is positive. It increases the surcharge as the pool granularity decreases. Article 259 (1): Because of the effect of the negative B coefficient for many poor credit quality pools, or the effect of the E coefficient for very short term securitisations with creditor friendly jurisdictions, the can be very low. So a of 0.3 has been set by the Basel RSW, to have a minimum capital surcharge.&' = max; ) × &' = +(-#, $#, *, %)
# ?@ABC #678 D 9:;'; < 6>=>9>+ 1250% × 8% × Article 255 (6): SA pool capital before securitisationThis item is the , before any effect of provisions and other adjustments. Article 263 (2): The pool capital is adjusted with the proportion W of assets in default. It is a proxy for provisions and aligns closer to . The defaulted assets are risk weighted at 625%. Multiplied by the capital ratio of 8%, this gives the coefficient 0.5. This step increases the risk sensitivity of SEC-SA.
SEC-SA Explained
678 9:;'; < =>9> × Article 264 (STS): This is the value for STS securitisations. Having as a constant is both Simple and Transparent. It is fit for purpose for a framework that is itself Simple, Transparent and Standardised (STS). Numerically, the capital surcharge of 50% is greater that p-floor of 30% in IRB. The value might be still high but it is logical. Article 263 (Non-STS): This is the value for Non-STS securitisations. The value is higher than for STS, as it should be. But the calibration is very high, as the capital surcharge is 100%. (By comparison, the US version of SEC-SA currently in force and voted by the US Congress fixed it at 50% = 0.5(). It is not sure that the US Congress will accept the proposed calibration from the Basel RSW without exercising their oversight). Article 269 (Resecuritisation): This is the value for Resecuritisation. It is more than for Non-STS securitisation, as it should be. (However, 1.5 is very close to the high credit quality non-STS retail mortgages securitisations under SEC-IRBA. This is due to the combined impact of the C coefficient and E coefficient in . This shows the problem with the design of SEC-IRBA, not that the capital surcharge is too high for resecuritisation). Article 263 (2): An additional penalty is added for those situations where a subpool does not allow the determination of W, with such subpool risk weighted at 1250%. Potentially performing assets are risk weighted at 1250%, double the risk weight of defaulted assets at 625%. This is not logical. #678 9:;'; < =>9> Article 259 (1): Because of the effect of the negative B coefficient for many poor credit quality pools, or the effect of the E coefficient for very short term securitisations with creditor friendly jurisdictions, the can be very low. So a of 0.3 has been set by the Basel RSW, to have a minimum capital surcharge.&' . = 0.3For information, this corresponds to the p-floor in SEC-IRBA = 0.5 = 1.0 = 1.5 1 −0× + 625% × 8% × 0= =
× F RW subject to a XRW floor of 15% (10% for STS) UT UT OO%×PQRRS The SSFA inherits the problems of the existing SFA. Requiring 1250% RW up to 1 times gives the appearance of conservatism, when in fact it is the primary source of regulatory arbitrage in capital relief transactions, as it puts the maximum amount of risk weight of 1250% in a area with medium risk around . (The solution would have been to replace this implicit 100% by an adjustment factor AF less than 100% in exchange of a better allocation via the capital surcharge) × 1+
UT OO%×PTQRRS 50= 1250% × GHEI ≤100% × ≤# 50= 1250% × FGHEI ≥100% × K= # −100% × C= max ( −100% × ; 0) 50= 1250% × 1 GHEI #≤100% ×
SSFA Explained (for SEC-IRBA and SEC-SA)
sameArticle 259 (SEC-IRBA) and Article 263 (SEC-SA) share the formula of capital allocation the SSFA (Simplified Supervisory Formula Approach). E= It allocates capital with the exponential function . The only difference is the input the pool capital, which is for SEC-IRBA and = for SEC-SA. # ?Article 256 defines the Attachment point and Detachment point of a given tranche . They are adjusted in the SSFA formula to give the parameters CKLower point and Upper point of the tranche to be used in the formula.
Comparison of Formula-Based Approaches
AF = 100% 55% in IRB, 60% in SA The SSFA should have an to 100%. An appropriate value is adjustment factor that it not equal The SSFA inherits the problems of the existing SFA, by having an implicit adjustment factor AF of 100% in the formula.
%The Tranche Maturity () is a notion used in trading books, not banking books for which this regulation is designed. The risk driver is %Asset Maturity () . The “switch” from to is a flawed financial concept. The definition of Tranche Maturity in Article 257 is Anti-European, as it generates long maturities based on the length of the legal process in a %given jurisdiction, embedded in the final legal maturity . It favours k%the UK. It is damaging for Italy and Portugal, where will almost always be at 5 years. Article 257: An anti-European component 1) 2) Article 261 and 262 50The 1 year Risk Weigh and the 5 year Risk Weight are rnrprovided based on seniority and STS status and ratings agencies external rating. The external rating is mapped to a Credit Quality Step. Article 256 # This defines the Attachment point and Detachment point of a given ?tranche . Article 261 ?H IE= # − This way of taking into account tranche thickness () is clumsy. Furthermore thickness is not taken into account for senior tranches. The SSFA, in contrast takes the thickness properly into account, for both non-senior and senior tranches. This is another reason to have SEC-SA as a priority over SEC-ERBA.
SEC-ERBA Explained
× 50nr
q oT p sUQRRS sUTsUQRRStSS uvwxyz{| vwx}~x |{x~Rv wx wv~w||) sUTsUQRRStSS uvwxyz{| vwx}~x |{x~Rv) 50subject to a RW floor of 15% for non−senior 50Article 261 (SEC-ERBA) defines the rules to follow to obtain a risk weight of a tranche . %= 1 +% −1× 80%fMin 1 year, Max 5 years 50=lm 50= 50 ×1 − I# − ; 50%lm
For most asset classes, at those rating levels SEC-IRBA or SEC-SA produces lower risk weights The current ratings-based approaches (RBA for IRB banks and RB(SA) for SA banks) required 1250% RW up to BB- for seniors and mezzanines This has been removed and more risk-sensitivity introduced External rating agencies tranche rating Seniority and tranche maturity Tranche thickness (for non-senior tranches) SEC-ERBA calibration: Clearly an issue for tranches with high ratings SEC-ERBA conceptual improvement: the RBA rating cliff has been addressed No such conceptual improvements has been implemented on the formula based methods SEC-IRBA and SEC-SA for mezzanine tranches, with 1250% RW still required up to x1 pool capital. (This could have been addressed with an Adjustment Factor AF) Securitisation External Ratings Based ApproachSEC-ERBA: Using based on:a risk weight mapping
70% 90% 120% 140% 160% 180% 210% 260% 310% 420% 580% 760% 860% 950% 5y 1050% 1130% 1250% 1250% tranche 1y 15% 15% 30% 40% 60% 80% Non-senior (thin) 120% 170% 220% 330% 470% 620% 750% 900% 1050% 1130% 1250% 1250% (but some progress on rating cliff) 5y 20% 30% 40% 45% 50% 65% 70% 90% 105% 140% 160% 180% 225% 280% 340% 420% 505% 1250% Senior tranche 15% 15% 25% 30% 40% 50% 60% 75% 90% 120% 140% 160% 200% 250% 310% 380% 460% 1250%
SEC-ERBA Explained: Major Calibration Issues
Appendix
Analysis of key components of securitisation risks Expected Loss, Unexpected Loss Capital for Real Risk (Economic Capital) Regulatory Capital and Misalignment with Real Risk Possible ways to align Real Risk with Regulatory Capital PCMA: Simple, Transparent and Comparable
• • • • • •
1.Issues with the Basel III approaches 2.After Basel III: building capital rules that make sense
100% 100% 0.0977% 90% 90% 6.2500% 1.0742% 80% 80% Average Loss Max Loss PD=50%, LGD=100%, N=4 Average Loss Max Loss PD=50%, LGD=100%, N=10 5.4687% 70% 70% 17.1875% 31.2500% 60% 60% 37.6953% 50% 50% 62.3047% 40% 40% Risk Scale: Capital Structure Risk Scale: Capital Structure 68.7500% 82.8125% 30% 30% 94.5313% 20% 20% the As the clearly visible 98.9258% increases, “Inverted S” curve is 93.7500% Granularity Loss Distribution with 4 uncorrelated assets (PD=50%, LGD=100%) 10% Loss Distribution with 10 uncorrelated assets (PD=50%, LGD=100%) 10% 99.9023% 0% 0% 0% 0% 80% 60% 40% 20% 80% 60% 40% 20% 100% 100% 1.3: N = 4 assets Probability (%) 1.6: N = 10 assets Probability (%)
100% 100% 0.3906% 90% 90%
3.5156% 80% 80% Average Loss Max Loss PD=50%, LGD=100%, N=2 Average Loss Max Loss PD=50%, LGD=100%, N=8 25.0000% 70% 70% 14.4531%
60% 60% 36.3281% 50% 50% 63.6719% 40% 40% Risk Scale: Capital Structure Risk Scale: Capital Structure
30% 85.5469% 30% 75.0000% 20% 20% 96.4844% Loss Distribution with 2 uncorrelated assets (PD=50%, LGD=100%) 10% Loss Distribution with 8 uncorrelated assets (PD=50%, LGD=100%) 10% 99.6094% 0% 0% 0% 0% 80% 60% 40% 20% 80% 60% 40% 20% 100% Probability (%) 100% Probability (%) 1.2: N = 2 assets 1.5: N = 8 assets
100% 100%
1.5625% 90% 90%
80% 80% Average Loss Max Loss PD=50%, LGD=100%, N=1 Average Loss Max Loss PD=50%, LGD=100%, N=6 10.9375% Loss Distribution with 1 asset (PD=50%, LGD=100%) shape Loss Distribution with 6 uncorrelated assets (PD=50%, LGD=100%) The “Inverted S” 1: Granularity (N) Effect on Loss Distribution curve starts taking 1.1: N = 1 asset (with PD = 50% and LGD = 100%) 1.4: N = 6 assets
100% 0.5635% 90% 3.1560% 80% Average Loss Max Loss PD=50%, LGD=100%, ρD=5% 9.8656% 70% 22.2261% 60% 39.7981% 50% 59.6760% 40% Risk Scale: Capital Structure 77.6414% 30% 90.3793% 20% 97.1375% 10% Loss Distribution with 10 correlated assets (PD=50%, LGD=100%, ρD=5%) 99.5565% 0% 0% 80% 60% 40% 20% 100% 2.3: = 5% Probability (%)
100% 100% 0.2612% 1.7407% 90% 90% 1.9891% 5.9228% 80% 80% 7.6920% Average Loss Max Loss PD=50%, LGD=100%, ρD=10% Average Loss Max Loss PD=50%, LGD=100%, ρD=2.5% 13.7489% 70% 70% 19.9686% 25.5896% 60% 60% 38.9511% 40.8167% 50% 50% 60.8869% 57.6998% 40% 40% Risk Scale: Capital Structure Risk Scale: Capital Structure 80.0090% 73.7870% 30% 30% 92.3942% 86.6965% 20% 20% curve As the 98.0868% 95.0343% Default Correlation increases, it flattens the “Inverted S” 10% 10% Loss Distribution with 10 correlated assets (PD=50%, LGD=100%, ρD=10%) Loss Distribution with 10 correlated assets (PD=50%, LGD=100%, ρD=2.5%)99.7610% 98.9637% 0% 0% 0% 0% 80% 60% 40% 20% 80% 60% 40% 20% 100% Probability (%) 100% Probability (%) 2.2: = 2.5% 2.5: = 10%
100% 100% 0.0977% 1.0465% 90% 90% 1.0742% 4.4954% 80% 80% Average Loss Max Loss PD=50%, LGD=100%, ρD=0% 5.4687% Average Loss Max Loss PD=50%, LGD=100%, ρD=7.5% 11.8961% ) Effect on Loss Distribution2: Default Correlation ( Loss Distribution with 10 correlated assets (PD=50%, LGD=100%, ρD=0%)99.9023% Loss Distribution with 10 correlated assets (PD=50%, LGD=100%, ρD=7.5%)99.2899%
100% 100%
90% 90%
80% 80% Average Loss Max Loss PD=50%, LGD=75%, ρD=10% Average Loss Max Loss PD=50%, LGD=45%, ρD=10% 1.7407% 70% 70% compresses the “Inverted S” curve 5.9228% As the Loss Given Default reduces, it 60% 60% 13.7489% 50% 50% 25.5896% 1.7407% 40.8167% 40% 5.9228% 40% Risk Scale: Capital Structure Risk Scale: Capital Structure 13.7489% 57.6998% 25.5896% 30% 30% 73.7870% 40.8167% 57.6998% 20% 20% 86.6965% 73.7870% 86.6965% 95.0343% 10% 10% 95.0343% Loss Distribution with 10 correlated assets (PD=50%, LGD=75%, ρD=10%) Loss Distribution with 10 correlated assets (PD=50%, LGD=45%, ρD=10%) 98.9637% 98.9637% 0% 0% 0% 0% 80% 60% 40% 20% 80% 60% 40% 20% 100% 100% 3.3: LGD = 75% Probability (%) 3.6: LGD = 45% Probability (%)
100% 100%
90% 90%
1.7407% 80% 80% Average Loss Max Loss PD=50%, LGD=85%, ρD=10% Average Loss Max Loss PD=50%, LGD=55%, ρD=10% 5.9228% 70% 70% 13.7489% 60% 60% 25.5896% 1.7407% 50% 50% 5.9228% 40.8167% 13.7489% 40% 40% 57.6998% Risk Scale: Capital Structure 25.5896% Risk Scale: Capital Structure 40.8167% 30% 30% 73.7870% 57.6998% 86.6965% 20% 73.7870% 20% 86.6965% 95.0343% 10% 95.0343% 10% Loss Distribution with 10 correlated assets (PD=50%, LGD=85%, ρD=10%) Loss Distribution with 10 correlated assets (PD=50%, LGD=55%, ρD=10%) 98.9637% 98.9637% 0% 0% 0% 0% 80% 60% 40% 20% 80% 60% 40% 20% 100% Probability (%) 100% Probability (%) 3.2: LGD = 85% 3.5: LGD = 55%
100% 100% 1.7407% 90% 90% 5.9228% 80% 80% Average Loss Max Loss PD=50%, LGD=65%, ρD=10% Average Loss Max Loss PD=50%, LGD=100%, ρD=10% 13.7489%
3: Loss Given Default (LGD) on Loss Distribution
Loss Distribution with 10 correlated assets (PD=50%, LGD=65%, ρD=10%) Loss Distribution with 10 correlated assets (PD=50%, LGD=100%, ρD=10%)
100% 100%
90% 90%
80% 80% Average Loss Max Loss PD=5%, LGD=45%, ρD=10% Average Loss Max Loss PD=30%, LGD=45%, ρD=10% 70% 70%
60% 60%
50% 50% curve collapses 40% 40% Risk Scale: Capital Structure Risk Scale: Capital Structure 2.32%0.75%0.16% As the Probability of Default goes down, the “inverted S” 5.69% 30% 30% 11.92% 22.03% 20% 20% 36.56% 1.95%0.75%0.27%0.09%0.03%0.01%0.00% 4.86% 54.88% 10% 10% 74.53% Loss Distribution with 10 correlated assets (PD=5%, LGD=45%, ρD=10%) 11.89% Loss Distribution with 10 correlated assets (PD=30%, LGD=45%, ρD=10%) 91.17% 30.15% 0% 0% 0% 0% 80% 60% 40% 20% 80% 60% 40% 20% 100% 100% 4.3: PD = 30% Probability (%) 4.6: PD = 5% Probability (%)
100% 100%
90% 90%
80% 80% Average Loss Max Loss PD=40%, LGD=45%, ρD=10% Average Loss Max Loss PD=10%, LGD=45%, ρD=10% 70% 70%
60% 60%
50% 50%
40% 40% 2.3204%0.5760% Risk Scale: Capital Structure Risk Scale: Capital Structure 6.2297% 13.3121% 30% 30% 24.2615% 2.43%0.96%0.34%0.10%0.03%0.00% 38.9843% 20% 20% 5.68% 56.2203% 12.47% 73.5191% 10% 26.02% 10% 87.8288% Loss Distribution with 10 correlated assets (PD=40%, LGD=45%, ρD=10%) Loss Distribution with 10 correlated assets (PD=10%, LGD=45%, ρD=10%) 51.97% 96.7478% 0% 0% 0% 0% 80% 60% 40% 20% 80% 60% 40% 20% 100% Probability (%) 100% Probability (%) 4.2: PD = 40% 4.5: PD = 10%
100% 100% 90% 90% 80% Average Loss Max Loss PD=20%, LGD=45%, ρD=10% 80% Average Loss Max Loss PD=50%, LGD=45%, ρD=10% 70% 70% 60% 60% 50% 50% 1.7407% 40% Risk Scale: Capital Structure 40% 5.9228% Risk Scale: Capital Structure 1.82%0.65%0.18%0.03% 13.7489% 30% 4.41% 25.5896% 30% 9.48% 40.8167% 20% 18.48% 57.6998% 20% 32.91% 73.7870% 10% 53.54% 86.6965% 10% Loss Distribution with 10 correlated assets (PD=20%, LGD=45%, ρD=10%) 4: Probability of Default (PD) on Loss Distribution Loss Distribution with 10 correlated assets (PD=50%, LGD=45%, ρD=10%) 95.0343% 78.49% 0% 98.9637%100% 80% Probability (%)60% 40% 20% 0% 0% 100% 80% Probability (%)60% 40% 20% 0% 4.1: PD = 50% 4.4: PD = 20%
100% 100%
90% 90%
80% 80%
70% 70% Average MVaR MVaR (SPD=30%, LGD=45%, ρA=16%) SPD=30%, LGD=45%, ρD=10% Average EL EL (PD=5%, LGD=45%, ρA=20%) PD=5%, LGD=45%, ρD=6% LGD Average MVaR MVaR (SPD=30%, LGD=45%, ρA=16%) LGD The “stressed” loss distribution is called a Marginal Value at Risk at 99.9% confidence level, or MVaR 60% 60% Expected Loss or EL
50% 50% The “normal” loss distribution is called a Marginal 40% 40% Risk Scale: Capital Structure Risk Scale: Capital Structure capital correlated is called using an “Asset any single asset 30% the MVaR, the “conservative” 30% When the granularity increases a lot, such that represents a small part of the overall portfolio, the loss distributions become smooth. They are obtained Correlation” instead of a *“Default Correlation” *U When the capital is defined only as distribution of a granular portfolio 20% 20% 10% Conservative Capital Distribution with correlated granular portfolio 10% Capital Distribution with correlated granular portfolio and 10 assets
0% 0% 0% 0% 80% 60% 40% 20% 80% 60% 40% 20% 100% 100% Probability (%) Probability (%) 5.2: Pool Capital = MVaR - EL 5.4: Conservative Pool Capital = MVaR
100% 100%
90% 90%
80% 80% Average SL (99.9%) SPD=30%, LGD=45%, ρD=10% Average EL (50.0%) PD=5%, LGD=45%, ρD=6% LGD default SPD 70% 70% Average MVaR MVaR (SPD=30%, LGD=45%, ρA=16%) Average EL EL (PD=5%, LGD=45%, ρA=20%) LGD higher (stressed) probability of When the bank’s is under stress at 99.9% confidence, the assets with a normal PD, behave with a the “Capital Structure” 60% 60% The Capital Requirement of this portfolio is the Unexpected Loss. This Capital is distributed along
50% 50% When the capital is defined as the granular portfolio is called “neutral” the capital distribution of a correlated 40% 40% difference between the MVaR and the EL, Risk Scale: Capital Structure Risk Scale: Capital Structure under stress (at 99.9% The Unexpected Loss is the difference between the loss of the assets when the bank is confidence) and the loss of the assets when the bank is not under stress (50% confidence) Capital Distribution with 10 correlated assets Capital Distribution with correlated granular portfolio 5.1: Unexpected Loss = Stressed (99.9%) Loss – Expected (50.0%) Loss 5.3: Capital Neutrality
5: Securitisation Capital – The Basics
100%
90%
80%
70% Average MVaR MVaR (SPD=30%, LGD=45%, ρA=16%) LGD up to the Average MVaR… any of the graphs previously, There is no loss distribution, in that would require a 1250% RW 60%
50%
40% Risk Scale: Capital Structure
30% Of note, the capital is distributed on both sides of the Average MVaR 20% Conservative Capital Distribution with correlated granular portfolio
Y-axis: Converting Capital into Risk Weight (RW)
100% x7
90%
x6 (Pool Capital) 80%
x5 70% Average MVaR MVaR (SPD=30%, LGD=45%, ρA=16%) LGD Describing the allocation of capital with a risk scale represented by attachment points expressed as a percentage of the capital structure (from 0% to 100%) does not facilitate comparability. (Values from 0% to 100% are not themselves sensitive to risk) It is better to describe the allocation of capital with a risk scale where attachment points are expressed as a multiple of pool capital By using pool capital multiples (PCM), not only comparability is enhanced, but tranche thickness (difference between detachment and attachment points) becomes sensitive to risk 60%
• • • x4
50%
x3 40% Risk Scale: Capital Structure Risk Scale: Multiple of Pool Capital -@@C
x2 30% Real Risk is distributed fairly on both sides of x1 times Pool Capital 20% Conservative Capital Distribution with correlated granular portfolio
X-axis: Risk Scale as Pool Capital Multiplier (PCM)
Industry SA and IRB proposals to realign Regulatory Risk and Real Risk using an Adjustment Factor (AF) (as described in the “European SSFA” paper by Duponcheele, Linden & Perraudin)
2 rules Current Basel SEC-IRBA range [0.3 to 1.5} (current US value) STS SEC-SA (p=0.5) SEC-SA (p=1.0)
The Regulators’ View of Risk (RW vs PCM)
Re-securitisation (p=1.5) The SSFA inherits the problems of the existing SFA, by having an implicit Adjustment Factor AF of 100% in the formula
10% 30% 60% 100% 200% 300% 400% 550% 700% 850% 1000% 1150% 1250% Relevant RW
Multiplier Pool Capital x3.50 - x4.00 x3.00 - x3.50 x2.50 - x3.00 x2.00 - x2.50 x1.75 - x2.00 x1.50 - x1.75 x1.25 - x1.50 x1.00 - x1.25 x0.75 - x1.00 x0.50 - x0.75 x0.25 - x0.50 x0.00 - x0.25 x4.00 and above
1 2 3 4 5 6 7 8 9 10 11 12 13 Example for SA Sensitivity Steps
7% 12% 25% 55% 115% 185% 280% 400% 525% 700% 900% 1100% 1250% Relevant RW
Multiplier Pool Capital x3.50 - x4.00 x3.00 - x3.50 x2.50 - x3.00 x2.00 - x2.50 x1.75 - x2.00 x1.50 - x1.75 x1.25 - x1.50 x1.00 - x1.25 x0.75 - x1.00 x0.50 - x0.75 x0.25 - x0.50 x0.00 - x0.25 x4.00 and above There is no need to replicate the errors of the SFA (Basel 2) or SSFA (Basel 3) by requiring 1250% RW up to Pool Capital. Requiring this implies either cliff effects and consequent capital arbitrage (Basel 2) or big deviations from capital neutrality (Basel 3). Both create negative distortions in the market. To avoid those negative effects, adopting a formulaic approach such as the “European SSFA” or a non formulaic approach such as the “Pool Capital Multiplier Approach” would address the problems at their core. There will be a point in the future where (European?) policy makers will realise that to have a proper functioning market, one will either need to have a nationalised state-backed guaranteed market (such as in the US, by ignoring the securitisation framework altogether) or a market where the rules themselves need to be simple, transparent and comparable. Such simple, transparent and comparable rules could look like that:
Basel IV… or V…: a Future Opportunity to Correct Basel III?
x6 Allocation Pool Capital Cliff Target +20%
x5
x4 as multiple of pool capital) 3
x3 To reduce capital arbitrage, Significant Risk can be defined as the area below the blue curve, for steps 2 to 12 (steps 13 and 1 are excluded) A Significant Risk Transfer (SRT) test is satisfied when 50% of the Significant Risk is placed with outside investors Risk Weight of Tranche = area below the blue line
• • Attachment point A and the detachment point D, expressed (i.e. weighted average of RW in previous tables between the [The authors can provide the PCMA spreadsheet on request] (This is simple and transparent and can be easily compared) Risk Scale = Pool Capital Multiplier x2 Capital Allocation with 13 Sensitivity Steps D 7
x1 Target Calibration (+20%) with 13 progressive Sensitivity Steps A
Basel IV… V...? Pool Capital Multiplier Approach (PCMA)
10% 10% 10% 10%10%30%60%110%200%300%400%550%700%850%1000%1150%1250% 4.63% Capital x1.4 Multiplier Approach ( Securitisation)After based on Pool Capital Tranche Risk Weights (i.e 40% capital surcharge) 1.65 1.40 without formulae x5.0x4.0x3.0x2.0x1.0x0.0 x35.0 x30.0 x25.0 x20.0 x15.0 x10.0 Capital 2.80% Solution without ratings and Pool Capital Multiples Residential Mortgages ( Securitisation)Before Non-Neutrality Ratio (EBA definition): Non-Neutrality Ratio (excluding "floor"):
x7.64 x6.21x5.25x4.36 x1.79 x0.00 x1.00 Capital of Pool x35.71 as a Multiple Pool Capital as a 100.0% 21.4% 17.4%14.7%12.2% 5.0% 0.0% 2.80% Tranche Attachment Point Percentage of Structure Technical note: Capital = Risk Weight * 8%
4.0%2.7%2.5% 7.2% 5.0% 78.6% Tranche Thickness
Asf BBsf Bsf AAsf BBBsf Rating Unrated Tranche External
50% 20% 100%350% Capital 1250% 1250% 14.53% x4.7 Spanish RMBS ( Securitisation)After Tranche Risk Weights (Standardised Approach) (i.e 374% capital surcharge)
Pool Capital Multiplier Approach (PCMA): a practical example
CASE STUDY: SPANISH RMBS (Source: EBA Discussion Paper, October 2014) Non-Neutrality Ratio (EBA definition): Non-Neutrality Ratio (excluding senior tranche ("floor")):
Contacts
Georges Duponcheele is Head of Banking Solutions, BNP Paribas. Alexandre Linden is a Senior Quantitative Structurer, BNP Paribas. William Perraudin is Director of RCL and Adjunct Professor of Imperial College, London. georges.duponcheele@bnpparibas.com alexandre.linden@bnpparibas.com william.perraudin@riskcontrollimited.com. The authors are: The authors may be contacted at: The paper “Comments on the Commission’s Proposals for Reviving the European Securitisation Market” may be found at: http://www.riskcontrollimited.com/insights/comment-commission-proposals-securitisation/
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Notes
• • i. ii. 1. 2. 3. 10.66 CMBS ABS 41.08 %
[5] 0
[45] 40 35 30 25 20 15 10
[25] 399 2009
[106] 713 2008 2,147 €bn 418 175 2007 - 2,500 2,000 1,500 1,000 €bn
[100] 193 SME Non-neutrality ratio is a technical term for Capital Multiplier A A- B B- A+ B+ AA AA- BB BB- AAA AA+ BBB+ BBB BBB- BB+ CCC+ External Rating (*) Below CCC+
[1] 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Steps All other Credit Quality SEC-SA: SEC-IRBA: SEC-ERBA: in Europe (RBA or RB-SA) Current Basel 2 hierarchy applied •About 10% surcharge, •IRB originators / sponsors only •Use of IRB proxies not authorised in Europe • • • • = + = + × # ?@ABC = 50 × 8% B(K −C) × −L∙6L∙ E=F B = − BThe variable is the amount of capital allocated with the exponential Efunction . AF sUQRRS × 50 + r q nTop = # = Min 0.0, Max 1.0 For non-senior tranches 1y External Rating (*) AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ Below CCC+ 70% 70% 60% 60% 34.3750% 50% 50% 50.0000% 65.6250% 40% 40% Risk Scale: Capital Structure Risk Scale: Capital Structure 30% 30% 89.0625% 20% 20% 10% 10% 98.4375% 0% 0% 0% 0% 80% 60% 40% 20% 80% 60% 40% 20% 100% Probability (%) 100% Probability (%) 70% 70% 17.1875% 24.0681% 60% 60% 37.6953% 40.3906% 50% 50% 62.3047% 58.6258% 40% 40% Risk Scale: Capital Structure Risk Scale: Capital Structure 82.8125% 75.5929% 30% 30% 94.5313% 88.4829% 20% 20% 98.9258% 96.1119% 10% 10% 0% 0% 0% 0% 80% 60% 40% 20% 80% 60% 40% 20% 100% Probability (%) 100% Probability (%) 2.1: = 0% 2.4: = 7.5% 70% 70% 25.5896% 1.7407% 60% 60% 5.9228% 40.8167% 50% 13.7489% 50% 57.6998% 25.5896% 40% 40% Risk Scale: Capital Structure 40.8167% Risk Scale: Capital Structure 73.7870% 30% 57.6998% 30% 86.6965% 73.7870% 20% 20% 86.6965% 95.0343% 10% 95.0343% 10% 98.9637% 98.9637% 0% 0% 0% 0% 80% 60% 40% 20% 80% 60% 40% 20% 100% Probability (%) 100% Probability (%) 3.1: LGD = 100% 3.4: LGD = 65% 30% 30% 20% 20% 10% 10% 0% 0% 0% 0% 80% 60% 40% 20% 80% 60% 40% 20% 100% 100% Probability (%) Probability (%) 10% 0% 0% 80% 60% 40% 20% 100% 0% 50% 950% 900% 850% 800%Probability (%)750% 700% 650% 600% 550% 500% 450% 400% 350% 300% 250% 200% 150% 100% 1250% 1200% 1150% 1100% 1050% 1000% Risk Weight (%) x1 10% x0 0% 0% 80% 60% 40% 20% 100% 0% 50% 950% 900% 850% 800%Probability (%)750% 700% 650% 600% 550% 500% 450% 400% 350% 300% 250% 200% 150% 100% 1250% 1200% 1150% 1100% 1050% 1000% Risk Weight (%) of mis- Risk is Risk: the arbitrage with Real AF alignment Regulatory misaligned is a source AF = 100% 0% 50% 950% 900% 850% 800% 750% 700% 650% 600% 550% 500% 450% 400% 350% 300% 250% 200% 150% 100% 1250% 1200% 1150% 1100% 1050% 1000% Risk Weight (%) The SSFA should have an equal to 100%. An appropriate value is 55% in IRB, 60% in SA Adjustment Factor AF that is not
[1] 2 3 4 5 6 7 8 9 10 11 12 13 Example for IRB Sensitivity Steps x0 0% 750% 500% 250% 1250% 1000% Risk Weight (%) 5.19 4.74 Basel 2 rules with SA ratings 35% Capital 2.80% Spanish Residential ( Securitisation)Before (Standardised Approach) Mortgages Pool Risk Weight