First guarantee scheme - prudential treatment
6.6 How will the RWA’s be calculated for exposures subject to the first guarantee scheme: can we assume government cover, reducing our RWA?
The setup of the guarantee scheme is a form of synthetic securitization and hence the securitization framework is applicable (CRR Article 234). This means that, once the definitive guaranteed portfolio is known on 31 December 2020, capital requirements should be calculated based on the securitization framework. Until 1 January 2021, the state guarantee cannot be recognized as a CRM technique for the purpose of calculating capital requirements for the underlying loans. The treatment under this securitization framework is dependent on whether a significant risk transfer is present or not. The guarantee on the bank’s portfolio can only be recognized under the securitization framework if a significant risk transfer took place. The secured part of the tranches can receive the same risk weight as direct exposures to the guarantor.
If the Significant Risk Transfer condition is not met or the credit institution (from 1 January 2021) chooses not to make use of this option on the basis of CRR article 247 (2) , exposures should be risk weighted as if no securitization took place, which means that in this case the guarantee cannot be taken into account.
Hence one can conclude that RWA’s might be reduced under the securitization framework but will never rise compared to the RWA’s of unsecured corporate exposures.
6.6/1 Can SRT analyses be made only as from end of December 2020 when the reference portfolio will be originated?
Yes, until then, the guarantee is not effective. The final portfolio to which the guarantee applies is only known end of December 2020. Till that date, the guaranteed portfolio will grow steadily by new “guaranteed loans” that comply with the eligibility criteria and that are not deselected by the institution. Hence, the final SRT analysis can only be made based on the final composition of the guaranteed portfolio end of December 2020, when the needed reliable loss parameters on the underlying debtors of the final portfolio, enabling the competent authority to judge whether capital relief is matched by significant risk transfer (crucial for SRT recognition), can be transmitted.
As a conclusion, until end of December 2020, a credit institution cannot apply the securitization framework and cannot take into account the state guarantee when calculating its capital requirements for credit risk of the underlying exposures.
6.6/2 Can a credit institution that uses the standardised approach to calculate credit risk capital requirements, for the calculation outside the securitisation framework of these capital requirements for each underlying individual loan, use the loss rate
Example: an underlying exposure for a total amount of 100 to a company without an external rating and in the absence of any eligible credit risk mitigating (CRM) techniques other than the state guarantee.
The risk weight for the amount of 3 for the first tranche amounts to 100%; The weighted-average risk weight for the amount of 2 for the second tranche amounts to 50% and is equal to the weighted average of the part of the exposure without guarantee (1*100%) and the part with guarantee (1*0%), which receives the risk weight of the guarantor. The weighted-average risk weight for the amount of 95 for the third tranche amounts to 20 % [((19*100%) + (76*0%))/95].
The weighted-average risk weight for the entire individual exposure thus amounts to 23% in this example.
|
|
exposure amount |
weighted-average risk weight |
|
tranche 1 |
3 |
100% |
|
tranche 2 |
2 |
50 % |
|
tranche 3 |
95 |
20 % |
|
portfolio |
100 |
23 % |
Answer to the question: The above proposed calculation of the capital requirements for an individual underlying loan of the guaranteed portfolio is NOT permitted outside the securitisation framework as mentioned in the answer to question 5.6.
It should moreover not be concluded that each individual loan benefits from the same guarantee distribution as that which applies to the portfolio (0% state guarantee for the first tranche of 3,50 % guarantee for the tranche of 3 to 5 and 80% guarantee for the tranche between 5 and 100).
A simple example illustrates this for a guaranteed portfolio amounting to 100 which consists of two underlying business loans:
- Loan 1 to borrower A for an amount of 95
- Loan 2 to borrower B for an amount of 5
Loan 2 defaults and the ex-post recovery rate is 50 %, so the final loss amounts to 2.5.
However, this loss does not meet the first loss threshold of 3% which applies to the portfolio of 100. No guarantee will be paid.