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FRM Part II · FRM Exam Part II · Credit Risk Management

A bank wants to reduce regulatory capital on a loan portfolio through a traditional true-sale securitization. Which feature is most necessary for the bank to obtain capital relief?

Capital relief requires significant transfer of credit risk to third parties along with legal isolation of the assets from the originator. If the bank keeps the first-loss piece, consolidates the vehicle, or provides implicit support, the risk effectively stays with it and relief is denied.

  1. ASignificant credit risk is transferred to third parties and the assets are legally isolated from the originatorCorrect
  2. BThe originator retains the full first-loss tranche and guarantees investors
  3. CThe special purpose vehicle is consolidated into the bank's balance sheet
  4. DThe bank provides implicit support to investors if losses occur

Explanation

Capital relief requires that the originator transfers significant credit risk and that the assets are legally isolated from it. Retaining first loss, consolidating the SPV or giving implicit support all keep the risk with the bank and undermine relief.

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