SA securitisation framework – calculation of the concentration ratio

Should the concentration ratio defined in Article 253(2) CRR be adjusted as securitisation tranches amortise or are written off over time?

The risk weight applicable to unrated securitisation positions in accordance with Article 252(1) CRR should be equal to the weighted average risk weight that would be applied to the securitised exposures multiplied by a concentration ratio. The concentration ratio is defined in Article 253(2) CRR as the sum of the nominal amounts of all the tranches divided by the sum of the nominal amounts of the tranches junior or pari passu with the tranche in which the position is held including the tranche itself. As a result of this calculation, the concentration ratio for the most senior position in a securitisation should be equal to 1, while more junior positions would receive a concentration ratio higher than 1. However, tranches amortise over time as they are repaid, and senior tranches usually amortise first, depending on the amortisation profile of the transaction and on the performance of the securitised exposures. Article 253(2) CRR refers only to the nominal amount of the tranches, without further specifications. If we consider only the nominal amount of outstanding tranches, it may result in situations where the concentration ratio would diminish over time as the most senior tranche amortise first. This would lead, in turn, to diminishing risk weights allocated to mezzanine and junior positions while the level of credit enhancement for these tranches did not increase. This type of situations may be seen as counterintuitive. Conversely, in cases where the most junior tranche is written off first due to losses incurred on the securitised exposures, the concentration ratio would increase for the senior and mezzanine tranches, reflecting the loss of credit enhancement provided by the more junior tranches. In order to follow a conservative approach, the nominal amount to be considered should be the nominal amount of all tranches at inception, without taking into account reductions of the nominal amount as a result of the normal amortisation of the tranches. However the nominal amount of tranches at inception should be reduced by the nominal amount of write-offs on tranches as a result of losses incurred on the underlying pool of securitised exposures, so as to reflect the corresponding reduction in the level of credit enhancement for the more senior tranches.