Minimum Capital Requirements for Credit Risk

The resulting risk weight is subject to a floor risk weight of 15%. Moreover, when a bank applies the SEC-SA to an unrated junior exposure in a transaction where the more senior tranches (exposures) are rated and therefore no rating can be inferred for the junior exposure, the resulting risk weight under SEC-SA for the junior unrated exposure shall not be lower than the risk weight for the next more senior rated exposure. 105 In particular, in the case of swaps other than credit derivatives, the numerator of KSA must include the positive current market value times the risk weight of the swap provider times 8%. In contrast, the denominator should not take into account such a swap, as such a swap would not provide a credit enhancement to any tranche. 106 Certain best market practices can eliminate or at least significantly reduce the potential risk from a default of a swap provider. Examples of such features could be cash collateralization of the market value in combination with an agreement of prompt additional payments in case of an increase of the market value of the swap and minimum credit quality of the swap provider with the obligation to post collateral or present an alternative swap provider without any costs for the SPE in the event of a credit deterioration on the part of the original swap provider. If SAMA are satisfied with these risk mitigants and accept that the contribution of these exposures to the risk of the holder of a securitization exposure is insignificant, SAMA may allow the bank to exclude these exposures from the KSA calculation. 107 As in the case of swaps other than credit derivatives, the numerator of KSA (i.e. weighted-average capital charge of the entire portfolio of underlying exposures) must include the exposure amount of the collateral times its risk weight times 8%, but the denominator should be calculated without recognition of the collateral. Resecuritisation Exposures 19.16 For resecuritization exposures, banks must apply the SEC-SA specified in 19.1 to 19.15 , with the following adjustments: (1) The capital requirement of the underlying securitization exposures is calculated using the securitization framework; (2) Delinquencies (W) are set to zero for any exposure to a securitization tranche in the underlying pool; and (3) The supervisory parameter p is set equal to 1.5, rather than 1 as for securitization exposures. 19.17 If the underlying portfolio of a resecuritization consists in a pool of exposures to securitization tranches and to other assets, one should separate the exposures to securitization tranches from exposures to assets that are not securitizations. The K A parameter should be calculated for each subset individually, applying separate W parameters; these calculated in accordance with 19.6 and 19.7 in the subsets where the exposures are to assets that are not securitization tranches, and set to zero where the exposures are to securitization tranches. The K A for the resecuritization exposure is then obtained as the nominal exposure weighted- average of the K A ’s for each subset considered. 19.18 The resulting risk weight is subject to a floor risk weight of 100%. 19.19 The caps described in 18.50 to 18.55 cannot be applied to resecuritization exposures. Alternative Capital Treatment for Term STC Securitizations and Short- Term STC Securitizations Meeting the STC Criteria for Capital Purposes 19.20 Securitization transactions that are assessed as simple, transparent and comparable (STC)-compliant for capital purposes as defined in 18.67 can be subject to capital requirements under the securitization framework, taking into account that, when the SEC-SA is used, 19.21 and 19.22 are applicable instead of 19.12 and 19.15 respectively. 19.21 The supervisory parameter p in the context of the SEC-SA is set equal to 0.5 for an exposure to an STC securitization.