Single Rulebook Q&A

Question ID: 2018_4262
Legal act : Regulation (EU) No 575/2013 (CRR) as amended
Topic : Securitisation and Covered Bonds
Article: 262
Paragraph: 1
Subparagraph:
COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable
Article/Paragraph : Not applicable
Type of submitter: Credit institution
Subject matter : Supervisory Formula Method - calculation of parameters
Question:

When using the Supervisory Formula Method, how do you calculate parameters T and L for a securitisation whose underlying assets are made of drawn and undrawn Revolving Credit Facilities?

Background on the question:

Before the amendment introduced to Article 262 CRR by Regulation (EU) 2017/2401, in the Supervisory Formula Method, parameters T (thickness of the tranche) and L (credit enhancement level) are computed using the nominal amount of the exposures securitised.

On the other hand, KIRBR is computed using the sum of the exposure values (EAD, or exposure at default) of the underlying assets of exposures that have been securitised.

Usually, nominal amount and EAD are quite similar, except in the case of assets such as Revolving Credit Facilities, where a conversion factor is applied to the nominal amount of the undrawn part of the assets in order to obtain EAD. As parameters T, L and KIRBR are computed using two different asset base values, there may be some inconsistencies in the result.   

To illustrate this point, let’s consider a portfolio of undrawn RCFs whose nominal outstanding is 100 and whose EAD is 50 (i.e. after applying a credit conversion factor of 50%). Let’s assume that KIRB amounts to 5 and that the junior tranche of the securitisation, which has been sold to a third party, amounts to 7  (Junior Tranche> KIRB).

In these conditions, KIRBR = 10% (5/50) and T = 7% (7/100). Even though in absolute terms the amount of the tranche sold to third party is above the IRB charge in capital risk, in relative terms, T < KIRBR.

Date of submission: 11/09/2018
Published as Final Q&A: 22/03/2019
EBA answer:

In the Supervisory Formula Method – as defined in Article 242(6) of Regulation (EU) No 575/2013 (CRR) before the amendment introduced by Regulation (EU) 2017/2401, the T (thickness) is calculated as the ratio of

the nominal amount of the tranche to

the sum of the nominal amounts of the exposures that have been securitised.

L (credit enhancement) is measured as the ratio of:

the nominal amount of all tranches subordinate to the tranche in which the position is held to

the sum of the nominal amounts of the exposures that have been securitised.

KIRBR is the ratio of

KIRB  (that is the regulatory capital requirements in relation to the underlying exposures as if these had not been securitised) to

the sum of the exposure values of the exposures that have been securitised, and is expressed in decimal form.

In SFA both T and L parameters are calculated before the application of the relevant credit conversion factor. 

Status: Final Q&A
Permanent link: link