Skip to main content
Entire section Custom print Text Only Rich Text Print

B. External Ratings-Based Approach

C 52/2017 STA Effective from 1/4/2021

40.Consider a non-senior securitisation tranche that has been assigned a rating by one of the eligible rating agencies corresponding to a rating of BB+. Suppose that the tranche has an attachment point A of 5%, a detachment point D of 30%, and effective tranche maturity of MT = 2 years.

  1. •From the look-up table for SEC-ERBA, a non-senior securitisation exposure rated BB+ with one-year maturity has a risk weight of 470%; the risk weight for a five-year maturity is 580%.
  2. •The tranche maturity of 2 years is one-quarter of the way between one year and five years, so the relevant maturity-adjusted risk weight based on linear interpolation is one quarter of the way between 470% and 580%, or 497.5%.
  3. •Because this is a non-senior tranche, it must also be adjusted for tranche thickness, which is the difference between D=30% and A=5%, a difference of 25%. The interpolated risk weight from the table should be multiplied by a factor of 1-(D-A)=0.75, which exceeds the floor of 50% and therefore should be used by the bank in the calculation (0.75 x 497.5%).
  4. •The resulting tranche risk weight is 373%.

41.Banks using the SEC-ERBA for securitisation exposures may prefer to incorporate the main features of the ERBA look-up tables into formal calculations of risk weights, including the relevant adjustments for tranche maturity and tranche thickness. In that case, each pair of 1-year and 5-year risk weights can be viewed as coefficients for a formulaic calculation of the risk weight for a tranche of given maturity MT, and in the case of non-senior tranches, thickness D-A.

42.For example, for a non-senior tranche rated BB+ with MT between one year and five years, the tranche risk weight RWT can be computed with a single formula as:

1

 

where the coefficients 4.7 and 5.8 correspond to the relevant values from the look-up table of 470% for one-year maturity and 580% for five-year maturity. Substituting in the values for A, D, and MT from the example above:

2

 

43.Senior tranches are not adjusted for thickness; hence, the calculation of the tranche risk weight RWT for a senior BB+ rated tranche would be computed as:

3

 

where again the coefficients 1.4 and 1.6 correspond to the relevant values from the senior tranche columns of the look-up table, specifically 140% for 1-year maturity and 160% for 5-year maturity.