Minimum Capital Requirements for Credit Risk

In certain circumstances, pool level credit enhancement will not be available to cover losses from either credit risk or dilution risk. In the case of separate waterfalls for credit risk and dilution risk, a bank should consult with SAMA as to how the capital calculation should be performed. 110 KIRB must also include the unexpected loss and the expected loss associated with defaulted exposures in the underlying pool. 111 Undrawn balances should not be included in the calculation of KIRB in cases where only the drawn balances of revolving facilities have been securitized. 112 In particular, in the case of swaps other than credit derivatives, the numerator of KIRB 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. 113 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 KIRB calculation. 114 As in the case of swaps other than credit derivatives, the numerator of K IRB (i.e. quantity 22.2(1)) 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. Definition of Attachment Point (A), Detachment Point (D) and Supervisory Parameter (p) 22.14 The input A represents the threshold at which losses within the underlying pool would first be allocated to the securitization exposure. This input, which is a decimal value between zero and one, equals the greater of (1) zero and (2) The ratio of (a) The outstanding balance of all underlying assets in the securitization minus the outstanding balance of all tranches that rank senior or pari passu to the tranche that contains the securitization exposure of the bank (including the exposure itself) to (b) The outstanding balance of all underlying assets in the securitization. 22.15 The input D represents the threshold at which losses within the underlying pool result in a total loss of principal for the tranche in which a securitization exposure resides. This input, which is a decimal value between zero and one, equals the greater of (1) zero and (2) The ratio of (a) The outstanding balance of all underlying assets in the securitization minus the outstanding balance of all tranches that rank senior to the tranche that contains the securitization exposure of the bank to (b) The outstanding balance of all underlying assets in the securitization.