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    This chapter describes the scope, definitions, operational and due diligence requirements and structure of capital requirements used to calculate risk-weighted assets for securitisation exposures in the banking book.

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    CRE - Calculation of RWA for credit risk

    CRE40 - Securitisation: general provisions

    This chapter describes the scope, definitions, operational and due diligence requirements and structure of capital requirements used to calculate risk-weighted assets for securitisation exposures in the banking book.

    Effective as of: 01 Jan 2023 | Last update: 26 Nov 2020

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    Scope and definitions of transactions covered under the securitisation framework


    Banks must apply the securitisation framework for determining regulatory capital requirements on exposures arising from traditional and synthetic securitisations or similar structures that contain features common to both. Since securitisations may be structured in many different ways, the capital treatment of a securitisation exposure must be determined on the basis of its economic substance rather than its legal form. Similarly, supervisors will look to the economic substance of a transaction to determine whether it should be subject to the securitisation framework for purposes of determining regulatory capital. Banks are encouraged to consult with their national supervisors when there is uncertainty about whether a given transaction should be considered a securitisation. For example, transactions involving cash flows from real estate (eg rents) may be considered specialised lending exposures, if warranted.


    A traditional securitisation is a structure where the cash flow from an underlying pool of exposures is used to service at least two different stratified risk positions or tranches reflecting different degrees of credit risk. Payments to the investors depend upon the performance of the specified underlying exposures, as opposed to being derived from an obligation of the entity originating those exposures. The stratified/tranched structures that characterise securitisations differ from ordinary senior/subordinated debt instruments in that junior securitisation tranches can absorb losses without interrupting contractual payments to more senior tranches, whereas subordination in a senior/subordinated debt structure is a matter of priority of rights to the proceeds of liquidation.


    A synthetic securitisation is a structure with at least two different stratified risk positions or tranches that reflect different degrees of credit risk where credit risk of an underlying pool of exposures is transferred, in whole or in part, through the use of funded (eg credit-linked notes) or unfunded (eg credit default swaps) credit derivatives or guarantees that serve to hedge the credit risk of the portfolio. Accordingly, the investors’ potential risk is dependent upon the performance of the underlying pool.


    Banks’ exposures to a securitisation are hereafter referred to as “securitisation exposures”. Securitisation exposures can include but are not restricted to the following: asset-backed securities, mortgage-backed securities, credit enhancements, liquidity facilities, interest rate or currency swaps, credit derivatives and tranched cover as described in CRE22.81. Reserve accounts, such as cash collateral accounts, recorded as an asset by the originating bank must also be treated as securitisation exposures.


    A resecuritisation exposure is a securitisation exposure in which the risk associated with an underlying pool of exposures is tranched and at least one of the underlying exposures is a securitisation exposure. In addition, an exposure to one or more resecuritisation exposures is a resecuritisation exposure. An exposure resulting from retranching of a securitisation exposure is not a resecuritisation exposure if the bank is able to demonstrate that the cash flows to and from the bank could be replicated in all circumstances and conditions by an exposure to the securitisation of a pool of assets that contains no securitisation exposures.


    Underlying instruments in the pool being securitised may include but are not restricted to the following: loans, commitments, asset-backed and mortgage-backed securities, corporate bonds, equity securities, and private equity investments. The underlying pool may include one or more exposures.

    Definitions and general terminology


    For risk-based capital purposes, a bank is considered to be an originator with regard to a certain securitisation if it meets either of the following conditions:


    the bank originates directly or indirectly underlying exposures included in the securitisation; or


    the bank serves as a sponsor of an asset-backed commercial paper (ABCP) conduit or similar programme that acquires exposures from third-party entities. In the context of such programmes, a bank would generally be considered a sponsor and, in turn, an originator if it, in fact or in substance, manages or advises the programme, places securities into the market, or provides liquidity and/or credit enhancements.


    An ABCP programme predominantly issues commercial paper to third-party investors with an original maturity of one year or less and is backed by assets or other exposures held in a bankruptcy-remote, special purpose entity.


    A clean-up call is an option that permits the securitisation exposures (eg asset-backed securities) to be called before all of the underlying exposures or securitisation exposures have been repaid. In the case of traditional securitisations, this is generally accomplished by repurchasing the remaining securitisation exposures once the pool balance or outstanding securities have fallen below some specified level. In the case of a synthetic transaction, the clean-up call may take the form of a clause that extinguishes the credit protection.

    स्रोत : www.bis.org

    [Solved] The asset generally not suitable for securitisation is ______________.


    The asset generally not suitable for securitisation is ______________.

    A. Receivables from government department

    B. Trade receivables

    C. Hire purchase finance receivables

    D. Mortgage loans

    Answer» B. Trade receivables

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    Related Multiple Choice Questions

    Which of the following is not related to securitisation process?

    The concept of securitisation is associated with ___________.

    In the case of securitisation, the trade debts and receivables are mostly in the nature of _____.

    Under securitisation, selected pool of assets are ‘passed through’, for converting them into securities, to another institution called:.

    Under “securitisation process”, the bank or financial institution which gives loan is known as;

    Under “securitisation process”, original borrower is known as;

    Under “securitisation process”, organisation which gives insurance and guarantee is known as;

    Under “securitisation process”, ---------- are instruments which issued subsidiary company in respect of receivables of holding or parent company

    -------- certificate under securitisation have multiple maturity structure.

    -------- certificate under securitisation have single maturity structure.

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    स्रोत : mcqmate.com

    Securitization: Definition, Pros & Cons, Examples

    Securitization is the process by which an issuer designs a marketable financial instrument b pooling various financial assets into one group.


    Securitization: Definition, Pros & Cons, Examples

    By JAMES CHEN Updated November 07, 2020

    Reviewed by GORDON SCOTT

    Fact checked by KIMBERLY OVERCAST

    What Is Securitization?

    Securitization is the pooling of assets in order to repackage them into interest-bearing securities. The investors that purchase the repackaged securities receive the principal and interest payments of the original assets.

    The securitization process begins when an issuer designs a marketable financial instrument by merging or pooling various financial assets, such as multiple mortgages, into one group. The issuer then sells this group of repackaged assets to investors. Securitization offers opportunities for investors and frees up capital for originators, both of which promote liquidity in the marketplace.

    In theory, any financial asset can be securitized—that is, turned into a tradeable, fungible item of monetary value. In essence, this is what all securities are.

    However, securitization most often occurs with loans and other assets that generate receivables such as different types of consumer or commercial debt. It can involve the pooling of contractual debts such as auto loans and credit card debt obligations.

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    How Securitization Works

    In securitization, the company holding the assets—known as the originator—gathers the data on the assets it would like to remove from its associated balance sheets. For example, if it were a bank, it might be doing this with a variety of mortgages and personal loans it doesn't want to service anymore. This gathered group of assets is now considered a reference portfolio. The originator then sells the portfolio to an issuer who will create tradable securities. Created securities represent a stake in the assets in the portfolio. Investors will buy the created securities for a specified rate of return.

    Often the reference portfolio—the new, securitized financial instrument—is divided into different sections, called tranches. The tranches consist of the individual assets grouped by various factors, such as the type of loans, their maturity date, their interest rates, and the amount of remaining principal. As a result, each tranche carries different degrees of risk and offer different yields. Higher levels of risk correlate to higher interest rates the less-qualified borrowers of the underlying loans are charged, and the higher the risk, the higher the potential rate of return.

    Mortgage-backed security (MBS) is a perfect example of securitization. After combining mortgages into one large portfolio, the issuer can divide the pool into smaller pieces based on each mortgage's inherent risk of default. These smaller portions then sell to investors, each packaged as a type of bond.

    By buying into the security, investors effectively take the position of the lender. Securitization allows the original lender or creditor to remove the associated assets from its balance sheets. With less liability on their balance sheets, they can underwrite additional loans. Investors profit as they earn a rate of return based on the associated principal and interest payments being made on the underlying loans and obligations by the debtors or borrowers.


    In securitization, an originator pools or groups debt into portfolios which they sell to issuers.

    Issuers create marketable financial instruments by merging various financial assets into tranches.

    Investors buy securitized products to earn a profit.

    Securitized instruments furnish investors with good income streams.

    Products with riskier underlying assets will pay a higher rate of return.

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    Benefits of Securitization

    The process of securitization creates liquidity by letting retail investors purchase shares in instruments that would normally be unavailable to them. For example, with an MBS an investor can buy portions of mortgages and receive regular returns as interest and principal payments. Without the securitization of mortgages, small investors may not be able to afford to buy into a large pool of mortgages.

    Unlike some other investment vehicles, many loan-based securities are backed by tangible goods. Should a debtor cease the loan repayments on, say, his car or his house, it can be seized and liquidated to compensate those holding an interest in the debt.

    Also, as the originator moves debt into the securitized portfolio it reduces the amount of liability held on their balance sheet. With reduced liability, they are then able to underwrite additional loans.


    Turns illiquid assets into liquid ones

    Frees up capital for the originator

    Provides income for investors

    Lets small investor play


    Investor assumes creditor role

    Risk of default on underlying loans

    Lack of transparency regarding assets

    Early repayment damages investor's returns

    Drawbacks to Consider

    Of course, even though the securities are back by tangible assets, there is no guarantee that the assets will maintain their value should a debtor cease payment. Securitization provides creditors with a mechanism to lower their associated risk through the division of ownership of the debt obligations. But that doesn't help much if the loan holders' default and little can be realized through the sale of their assets.

    स्रोत : www.investopedia.com

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