What is SFA approach?
The SFA formula is a blend of credit risk modeling results and supervisory judgment. The specification of S[Y] assumes that KIRB is an accurate measure of the total systematic credit risk of the pool of underlying exposures and that a securitization merely redistributes this systematic risk among its various tranches.
What is IRB in banking?
The internal ratings-based approach to credit risk allows banks to model their own inputs for calculating risk-weighted assets from credit exposures to retail, corporate, financial institution and sovereign borrowers, subject to supervisory approval.
What is advanced internal ratings-based approach?
An advanced internal rating-based (AIRB) approach to credit risk measurement is a method that requests that all risk components be calculated internally within a financial institution. Advanced internal rating-based (AIRB) can help an institution reduce its capital requirements and credit risk.
What is an inferred rating?
1 An inferred rating can be derived from another eligible rating to another tranche that ranks junior or equal (that is, pari-passu). » Use Internal Assessment Approach (IAA) for an unrated securitization exposure to an SA pool within an ABCP program (for example, liquidity facilities and credit enhancements).
What is SFA and Ssfa?
In the structured finance domain, most banks choose the Supervisory Formula Approach (SFA) and the Simplified Supervisory Formula Approach (SSFA) for the regulatory capital charges, and compare the expected cost with the benefits of moving to SFA in the search for regulatory capital relief.
What is PD EAD and LGD?
Banks must disclose their risk exposure. EAD, along with loss given default (LGD) and the probability of default (PD), are used to calculate the credit risk capital of financial institutions. Banks often calculate an EAD value for each loan and then use these figures to determine their overall default risk.
What does IRB stand for in finance?
Under the Basel II guidelines, banks are allowed to use their own estimated risk parameters for the purpose of calculating regulatory capital. This is known as the internal ratings-based (IRB) approach to capital requirements for credit risk.
Who provides LGD?
Under the foundation approach, BIS prescribes fixed LGD ratios for certain classes of unsecured exposures: Senior claims on corporates, sovereigns and banks not secured by recognized collateral attract a 45% LGD. All subordinated claims on corporates, sovereigns and banks attract a 75% LGD.
What does securitization mean in finance?
Securitization is the process in which certain types of assets are pooled so that they can be repackaged into interest-bearing securities. The interest and principal payments from the assets are passed through to the purchasers of the securities.
What is securitization exposure?
Securitization Exposure means an exposure to a special purpose vehicle that is unable to vary its capital structure on a voluntary basis and is secured primarily by financial assets on a non-recourse basis to the originator or seller of such assets.
How is Ssfa calculated?
(2) Then the [BANK] must calculateKSSFAaccording to thefollowing equation:KSSFA=ea·u−ea·la(u−l)(3) The risk weight for the exposure (expressed as a percent) is equal toKSSFA×1,250.
How is securitisation based on external ratings and inferred ratings?
SEC-ERBA is based on external ratings of the exposure, or inferred ratings when possible. For certain exposures, such as unrated liquidity facilities and credit enhancements in asset-backed commercial paper programmes, banks may also use a Securitisation – Internal Assessment Approach (SEC-IAA) to determine capital requirements.
What are the three approaches to securitization under Basel III?
Under Basel III, the hierarchy within the securitization framework consists of three approaches: the internal ratings-based approach (IRBA), the external ratings-based approach (ERBA), and the standardized approach (SA).
How does the revised securitization framework improve risk sensitivity?
The revised framework simplifies hierarchy in terms of the number of approaches, reduces mechanistic reliance on external ratings, and enhances risk-sensitivity. The framework addresses the capital treatment of securitization (both STC and non-STC), and resecuritization exposures.
How is K IRB determined in securitisation model?
This key bank-supplied input is denoted KIRB, which is the capital requirement for the exposures under the IRB model. A bank that cannot determine K IRB for a securitisation exposure must use the Securitisation – External Ratings-Based Approach (SEC-ERBA), provided that this method is allowed by the national regulator.