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FRM Part II · FRM Exam Part II · An Introduction to Securitisation

A bank holds a securitisation exposure that cannot be assessed under SEC-IRBA, SEC-ERBA or SEC-SA because it lacks the required information on the underlying pool. What is the default treatment under the Basel framework?

The exposure is assigned a 1,250% risk weight, effectively a full capital deduction at an 8% ratio. This penal outcome applies when no hierarchy approach can be used, for example because of insufficient information about the underlying pool.

  1. AA 100% risk weight
  2. BA risk weight equal to the weighted average of the underlying pool
  3. CA risk weight of 1,250%Correct
  4. DA 20% floor risk weight

Explanation

When none of the approaches can be applied, the exposure receives a 1,250% risk weight, which is equivalent to deducting it from capital at an 8% requirement. The pool-average treatment is not permitted for securitisation positions in the hierarchy.

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