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

Under the Basel securitisation framework, the hierarchy of approaches for determining risk weights of securitisation exposures begins with which approach, if the bank is permitted to use it and the conditions are satisfied?

The hierarchy starts with SEC-IRBA, available when the bank has approval to use internal ratings for the underlying pool and can estimate the needed parameters. If not, it falls to SEC-ERBA, then SEC-SA, and finally a 1,250% risk weight.

  1. ASecuritisation external ratings-based approach (SEC-ERBA)
  2. BSecuritisation standardised approach (SEC-SA)
  3. CSecuritisation internal ratings-based approach (SEC-IRBA)Correct
  4. DThe 1,250% risk weight

Explanation

The hierarchy ranks SEC-IRBA first, for banks approved to use IRB for the underlying pool and able to estimate its parameters. Next comes SEC-ERBA, then SEC-SA, and 1,250% applies when none can be used. Distractor SEC-ERBA is second in the hierarchy.

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