KIRB for purchased receivables in securitisations
Final EBA Draft
On 8th of April 2019, the EBA published its final 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 comprehensive information and the SEC-IRBA approach 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. An earlier draft proposed that the simplified procedure could only be applied for securitised exposure for that the institute is not the servicer. Furthermore, the servicing of the portfolio concerned was considered as a key criterion for access to the securitised portfolio and the availability of the information required for assessment purposes. The final draft defines qualified securitised exposure and distinguishes between different securitised exposures. The distinction is whether the institute that calculates KIRB is not the servicer or whether the institute though being servicer, is not being involved in the underlying contractual relationship and only has limited access to data and Information about the securitised exposure. The simpler KIRB calculation procedure for purchased receivables based on these RTS must therefore only be applied to securitisation positions where the bank does not service the underlying portfolio itself, or if the bank does service the underlying portfolio itself, it was not involved in the initial credit contractual relationship 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
Five 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 area of application of the KIRB specific rating system only covers qualified securitised exposures
- The institution which calculates KIRB has the permission to use the IRB approach regarding a minimum of one rating system within the risk class that corresponds to the qualified securitised exposures
- Every requirement for the use of the IRB approach from part 3, title II, chapter 3 of the CRR regarding rating systems – exceptions see below – are fulfilled
- The requirements set out in article 4 to 11 of the RTS are fulfilled instead of the corresponding CRR regulation for purchased receivables
- The requirements set out in article 12 and 13 of the RTS regarding data usage are fulfilled
For calculating KIRB using rating systems, which already have a permission for the function as originator of securitised exposures, the following conditions have to be satisfied:
- The rating system is exclusively being used for determining the PD of securitised exposures of the non-retail business
- The qualified securitised exposures that belong to the non-retail business are part of the area of application of this rating system
- The institute calculating KIRB uses the LGD values which are stated in article 6(2) (see below)
- Every requirement of part 3, title II, chapter 3 of the CRR regarding rating systems are fulfilled, with the exception of article 5 and article 10(3) of the RTS regulated requirements
- Instead of the according regulation of the CRR managing purchased receivables, the requirement of article 5 and article 10(3) of the RTS are fulfilled
- The requirements of article 12 and 13 of the RTS regarding data usage are fulfilled.
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 the existing CRR regulation 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, or if applicable the original lender, and servicer’s recovery practices and servicing standards as risk drivers if they don’t use separate calibration segments for different originators, or if applicable various original lenders, and servicers.
Institutes are able to set the LGD of the qualified securitised exposures of the retail business and for superior tranches of the non-retail business to 50%. In accordance for subsequent Tranches of the non-retail business, a LGD value of 100% should be implemented.
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 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.
In addition, the final draft RTS includes the requirement that the institute calculating the KIRB shall assess the relationship between the parties, market conditions and customer loyalty on the basis of information received from the originator, seller or original lender about the debtor during the original lending process and information received from the servicer during the servicing and risk management process. Calculating the risk-weighted exposure amounts for credit risks from securitisation exposures:
- 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.
- 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 and primary 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, portfolio data of the originator or of the original lender as well as data of the servicer from collection and liquidation policies applied as the primary source of information for estimating the risk parameters for model development purposes, quantification of risk parameters and application of the internal model to determine KIRB as primary data.
For the purpose of model development, quantification of risk parameters and the application of the internal model to calculate KIRB other data despite the primary data mentioned above may be used as proxy data. 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, quantify risk parameters and apply internal models for KIRB calculation. Approximations shall be representative and, if necessary and possible, shall be customised for the primary data. Otherwise, an appropriate surcharge for conservatism shall be chosen while estimating the risk parameter. For the purposes of model development, quantification of risk parameters and application of the internal models of KIRB determination, Articles 22 and 24(14) of the Securitisation Regulation (Regulation (EU) 2017/2402) allow the use of data on statistical and historical default and loss events provided by originators and sponsors, whether or not they meet the requirements of simple, transparent and standardised securitisations under that Regulation. 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 regarding their impact on the level of default rates and if necessary, adjustments might need to be made or an appropriate margin of conservatism added should these prove impossible.