1.In December 2014, the Basel Committee on Banking Supervision (BCBS) published a revised framework for calculating bank capital requirements for securitisation exposures, with further revisions in July 2016. The revised securitisation framework aimed to address a number of shortcomings in the Basel II securitisation framework and to strengthen the capital standards for securitisation exposures held in the banking book. The Central Bank’s Standards on Required Capital for Securitisation Exposures is based closely on the BCBS framework.

2.A central feature of the revised framework is a hierarchy of approaches to risk-weighted asset calculations. The BCBS framework includes approaches based on internal credit risk ratings of banks. These approaches have not been included in the Central Bank’s Standards, as internal ratings-based approaches are not deemed appropriate for use in capital calculations at this time by banks in the UAE.

3.Consequently, the hierarchy of approaches within the Central Bank’s Standards begins with the revised External Ratings-Based Approach (SEC-ERBA), and below that in the hierarchy the revised Standardised Approach (SEC-SA). For resecuritisations, the hierarchy excludes the SEC-ERBA, and instead begins with the SEC-SA. If neither the SEC-ERBA nor the SEC-SA can be applied for a particular securitisation exposure, a maximum risk weight of 1250% must be used for the exposure.

4.Calculations under both the SEC-ERBA and the SEC-SA depend to some degree on a measure of “tranche thickness.” The thickness of a tranche is determined by the size of the tranche relative to the entire securitisation transaction. In general, for a given attachment point, a thinner tranche is riskier than a thicker tranche, and therefore warrants a higher risk weight for risk-based capital adequacy purposes. While credit rating agencies capture some aspects of the risk related to tranche thickness in their external ratings, analysis performed by the BCBS suggested that capital requirements for a given rating of a mezzanine tranche should differ significantly based on tranche thickness, and this is reflected in the Standards.

5.Under the SEC-ERBA, risk weights also are adjusted to reflect tranche maturity. The BCBS incorporated a maturity adjustment to reflect unexpected losses appropriately in the capital calculations. External ratings used for SEC-ERBA typically reflect expected credit loss rates, and the BCBS concluded through analysis during the development process that the mapping between these expected losses and unexpected losses (the quantity that capital is intended to cover) depends on maturity.