In a synthetic securitisation of undrawn revolving credit facilities (“RCF”), which is compliant with Article 245
244 of Regulation (EU) No 575/2013 as amended by Regulation (EU) 2017/2401, what is the EAD that should be considered inside the securitisation (which will subject to the risk weighting according to the securitisation framework) and what is the EAD that should be considered outside the securitisation (which will continue to be risk weighted according to the approved IRB model for such exposures)?
The following provisions have to be considered:
- Article 4(1)(61) of Regulation (EU) No 575/2013 (CRR) states that securitisation means a transaction or scheme whereby the credit risk associated with an exposure or pool of exposures is tranched.
- Article 5 of Regulation (EU) No 575/2013 (CRR) states that for the purposes of Part Three, Title II, exposure means an asset or off-balance sheet item.
- Article 166(8) of Regulation (EU) No 575/2013 (CRR) sets out that the exposure value (EAD) under the IRB approach of an undrawn credit facility shall be the committed but undrawn amount multiplied by a conversion factor, while Article 111 (1) CRR under the SA approach sets out percentages that apply to nominal values depending on the degree of risk.
- Article 4(1)(56) of Regulation (EU) No 575/2013 (CRR) sets out that conversion factor means the ratio of an undrawn commitment that would be outstanding at default.
- Article 5(1)(a) of Delegated Regulation (EU) No 625/2014 states the possibility of securitising part of the credit risk of an exposure or pool of exposures and retaining the rest of the risk as a form of risk retention.
In this context, a securitisation can be structured in a way that only part of the credit risk associated with an exposure or pool of exposures is tranched, which could correspond to either a percentage or a fixed amount of the exposure value (EAD), as there is no limitation in this regard as long as the retained part is compliant with the minimum risk retention requirement.
As an illustration, in the case described in the background, the credit risk associated with a fixed amount of the EAD of a pool of revolving credit facilities (RCFs) - which are fully undrawn and therefore a conversion factor in accordance with Article 166(8) CRR has been applied - is tranched via a synthetic securitisation at inception. The risk associated with the rest of the EAD of the securitised exposures at inception is not tranched (i.e. it is ranked pari passu with the credit risk that has been securitised) and retained by the institution in accordance with Article 5 (1) (a) of Delegated Regulation (EU) No 625/2014. Also, future increases in the EAD because of drawings will be fully retained by the institution. Therefore, in such a case, in the event that the originator institution achieve significant risk transfer, the untranched exposure at day 1 and the future increases in the EAD because of the drawings will be subject to the general credit risk provisions of Chapter 3 CRR, while the capital requirements corresponding to the securitised EAD, which is fixed throughout the life of the securitisation, will be calculated in accordance with Article 251
249 of Chapter 5 of Regulation (EU) No 575/2013 as amended by Regulation (EU) 2017/2401.
Update 26.03.2021: This Q&A has been updated in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR).