Article

KIRB for purchased receivables

EBA Draft regarding SEC-IRBA for securitisations

On 19 June 2018, the EBA published its draft of Regulatory Technical Standards (RTS) specifying the conditions under which banks are permitted to calculate KIRB in accordance with the purchased receivables approach under art. 255, section 4 of the CRR in line with the securitisation regulation (regulation (EU) 2017/2401 amending regulation (EU) no. 575/2013).

The starting point is the newly introduced hierarchy of methods to calculate risk-weighted exposure amounts of securitisation positions where top priority is given to applying the internal ratings-based approach (SEC-IRBA). A bank may only use the securitisation standardised approach (SEC-SA) if the conditions for SEC-IRBA aren’t met (e.g. where there’s insufficient information on the securitisation’s underlying exposures, which can happen in the case of purchased receivables). Which is why these RTS propose a simpler procedure for determining KIRB for purchased receivables where banks don’t have the same information as servicers so that SEC-IRBA can be applied nevertheless.

These RTS take into account the special circumstances under which banks calculate capital requirements for securitisation transactions and appropriate specifications regarding the internal modelling of capital requirements. In this respect, they specify that when banks calculate KIRB pursuant to art. 255, section 4 CRR, in addition to the European Level 1 and Level 2 measures, the principles of the IRB framework are also to be applied. Furthermore, the servicing of the portfolio concerned is considered a key criterion for access to the securitised portfolio and the availability of the information required for assessment purposes. The simpler KIRB calculation procedure for purchased receivables based on these RTS must therefore only be applied to securitisation positions where the bank doesn’t service the underlying portfolio itself and therefore only has limited information. Some of the specifications for purchased receivables in art. 153, 154 and 184 CRR are adopted and worded differently to reflect the special features of securitisation structures.

 

Permission for calculating KIRB

Three conditions must be fulfilled to obtain permission to apply the IRB approach for calculating KIRB for the securitisation’s underlying exposures based on the purchased receivables approach in accordance with art. 255 section 4 CRR:

  • The bank in question is not the servicer of the securitisation’s underlying risk exposures; 
  • All requirements regarding the application of the IRB approach from part 3, title II, chapter 3 of the CRR on rating systems are fulfilled – with one exception, see below; 
  • The requirements of articles 3 to 9 of this draft RTS are fulfilled instead of the relevant CRR regulations on purchased receivables.

 

Relationship between the IRB regulations for purchased receivables and the SEC-IRBA framework

Instead of the requirements specified in art. 145 CRR on experience with using IRB approaches, it’s sufficient if the bank has received permission to use the IRBA for at least one rating system for the IRB exposure class to which the securitisation’s underlying exposure belongs. A three-year usage period of the rating system isn’t specified for these purposes.

What’s more, some of the draft RTS has been reworded with regard to securitisations and amendments to existing CRR regulations on purchased receivables (for example, art. 4 replaces the specifications on purchased receivables in art. 184 CRR on risk quantification by redrafting sections related to securitisation compared with the original portfolio purchasing context).

When allocating exposures to classes or pools, the banks are to look at the originator’s underwriting standards and servicer’s recovery practices and servicing standards as risk drivers if they don’t use separate calibration segments for different originators and servicers.

 

Entitlement to use retail risk quantification rules

The requirements of art. 153 section 6 CRR have been replaced regarding calculation of risk-weighted corporate exposures. For non-retail exposures, risk quantification standards of retail exposures can be used in accordance with part 3, title II, chapter 3, section 6 CRR if the following applies:

  • The redrafted requirements related to securitisations in art. 154 section 5 a) to d) CRR have been fulfilled and 
  • it would be unduly burdensome for the bank to apply risk quantification standards for corporate exposures.

The draft of the Regulatory Technical Standards also specifies when an unduly burdensome situation occurs. The bank’s implementation costs, data availability and operational expertise are taken into account, a minimum level of granularity for a particular pool is expected and the risk that the bank runs due to making securitisation investments is also reflected.

In the redraft of the requirements specifying when purchased receivables may be treated as retail exposures, requirement a) from art. 154 section 5 CRR is not adopted so that in the case of securitisations, receivables from related third parties and directly or indirectly originated receivables by the institution itself may also be purchased.

Calculating the risk-weighted exposure amounts for credit risks from securitisation exposures:

1) In the case of exposures from retail that comply with the requirements made, banks are to apply the calculation specified in art. 154 CRR for retail in order to work out the risk-weighted exposure amount.

2) In the case of non-retail exposures (regardless of whether these fulfil the appropriate requirements and are permitted to apply the risk quantification standards for retail or not), banks are to apply the calculation specified in art. 153 CRR for corporate exposures in order to calculate the risk-weighted exposure amount.

 

Requirements on data

If before transferring to the SSPE, the securitisations’ underlying exposures and their obligors weren’t the bank’s obligors or exposures, the data used to develop the model mustn’t be based on the bank’s obligor and exposure structure as stated in art. 174 c) CRR but on the securitisation’s underlying exposure structures.

In accordance with art. 180, section 2 c) first sentence CRR, the banks are not to use internal data but data that’s associated with the securitised exposures as the primary source of information for estimating the loss characteristics.

Proxy data used can be internal, external or pooled data in accordance with the CRR. The requirements to add a margin of conservatism described in art. 179 section 1 f) CRR must also be complied with if proxy data are used to develop models, calibrate risk parameters and apply internal models for KIRB calculation.

The calibration of the risk parameters is to be based on the bank’s definition of default that’s applied to the relevant internal model for calculating KIRB in accordance with art. 255, section 4 CRR. Further requirements must be met if external data or proxy data are used. The definition of default regarding the external data or the proxy data must comply with art. 178 CRR and be consistent with the bank’s definition of default that it applies, but extensive documentation must be carried out and deviations identified.

Deviations identified must be analysed for their impact on the level of default rates and adjustments might need to be made, or appropriate safety margins added should these prove impossible.

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Andrea Flunker
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Dr. Tanja Schlösser
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