Skip to content

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

A bank holds a securitisation position that is unrated and sits in the first-loss (equity) tranche. Under Basel's securitisation framework, which treatment is most consistent with the rules for such a position?

A first-loss tranche is treated most punitively, with deduction from capital or a risk weight up to 1,250%. It absorbs losses first, so its capital charge approaches the full exposure. The 15% floor is for senior positions, not the equity tranche.

  1. AApply a 20% risk weight because the pool is diversified
  2. BApply a 100% risk weight as for ordinary corporate exposures
  3. CApply the floor risk weight of 15% as for senior tranches
  4. DDeduct the position from capital or apply a very high risk weight (up to 1,250%), reflecting its loss absorptionCorrect

Explanation

First-loss positions absorb the earliest losses and receive the most punitive treatment, historically deduction from capital and in the current framework a risk weight up to 1,250%. A 15% floor applies to the most senior highly rated positions, not the equity tranche.

Did you get it right without looking?

One question tells you little. A timed set on An Introduction to Securitisation shows your real accuracy, how long you take and where you lose marks.

Practise An Introduction to SecuritisationFree diagnostic mock

More An Introduction to Securitisation questions