Re-calibration of the securitisation framework has resulted in the risk weight functions’ increased sensitivity to non-performance of the underlying reference portfolio and its weighted average LGD (e.g. SEC-IRBA method).  The rationale for the enhanced risk sensitivity is a post-crisis response to the current risk weight function (i.e. the supervisory formula method) which does not exhibit sufficient sensitivity to migration of the securitised positions from performing to non-performing.

In particular, key drivers of the risk weighting of securitisation positions referencing performing portfolios, is the unexpected loss or the capital requirement (“UL”) rather than expected loss (“EL”) component of regulatory capital of the reference portfolio and the expected loss given default of the reference portfolio, and therefore the default probability (“PD”) is an important factor for the determination of risk weighted exposure value (and hence capital requirement) and also the expected loss.  This contrasts with non-performing portfolios where the key driver is the difference between the best estimate of expected loss (ELBE - Article 153, paragraph 1 of CRR) and the loss given default (“LGD”) as the PD is 100%.  Therefore, the UL component of such a portfolio is expected to be lower compared to EL component. 

Furthermore, non-performing loans would have loan loss provisions against them or typically sold at a discount to their outstanding balance (collectively considered to be specific credit risk adjustments).  Where such non-performing loan portfolios are securitised, determination of the capital requirement and the expected loss on the basis of the outstanding balance / notional leads to a higher KIRB (using the internal ratings based approach) as the LGD is grossed-up to reflect the notional balance of the loans and hence no consideration being given to the purchase price discount or specific credit risk adjustment (“SCRA”).  Therefore, the application of the maximum risk weight for senior securitisation positions using the look-through approach under Article 267 of Regulation (EU) 2017/2401 where the SEC-IRBA method for risk weighting of securitisation positions is used leads to a significantly higher risk weight compared to the risk weight of the portfolio had it not been securitised.