Caps for Securitization Exposures

Effective from Dec 28 2022 - Dec 31 2022
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18.50	Banks may apply a “look-through” approach to senior securitization exposures, whereby the senior securitization exposure could receive a maximum risk weight equal to the exposure weighted-average risk weight applicable to the underlying exposures, provided that the bank has knowledge of the composition of the underlying exposures at all times. The applicable risk weight under the IRB framework would be calculated taking into account the expected loss portion. In particular:
	(1)	In the case of pools where the bank uses exclusively the SA or the IRB approach, the risk weight cap for senior exposures would equal the exposure weighted-average risk weight that would apply to the underlying exposures under the SA or IRB framework, respectively.
	(2)	In the case of mixed pools, when applying the SEC-IRBA, the SA part of the underlying pool would receive the corresponding SA risk weight, while the IRB portion would receive IRB risk weights. When applying the SEC-SA or the SEC-ERBA, the risk weight cap for senior exposures would be based on the SA exposure weighted-average risk weight of the underlying assets, whether or not they are originally IRB.
18.51	Where the risk weight cap results in a lower risk weight than the floor risk weight of 15%, the risk weight resulting from the cap should be used.
18.52	A bank (originator, sponsor or investors) using the SEC-IRBA for a securitization exposure may apply a maximum capital requirement for the securitization exposures it holds equal to the IRB capital requirement (including the expected loss portion) that would have been assessed against the underlying exposures had they not been securitized and treated under the appropriate sections of chapters 10 to chapter 16. In the case of mixed pools, the overall cap should be calculated by adding up the capital before securitization; that is, by adding up the capital required under the general credit risk framework for the IRB and for the SA part of the underlying pool.
18.53	An originating or sponsor bank using the SEC-ERBA or SEC-SA for a securitization exposure may apply a maximum capital requirement for the securitization exposures it holds equal to the capital requirement that would have been assessed against the underlying exposures had they not been securitized. In the case of mixed pools, the overall cap should be calculated by adding up the capital before securitization; that is, by adding up the capital required under the general credit risk framework for the IRB and for the SA part of the underlying pool, respectively. The IRB part of the capital requirement includes the expected loss portion.
18.54	The maximum aggregated capital requirement for a bank's securitization exposures in the same transaction will be equal to K_P * P. In order to apply a maximum capital charge to a bank's securitization exposure, a bank will need the following inputs:
	(1)	The largest proportion of interest that the bank holds for each tranche of a given pool (P). In particular:
		(a)	For a bank that has one or more securitization exposure(s) that reside in a single tranche of a given pool, P equals the proportion (expressed as a percentage) of securitization exposure(s) that the bank holds in that given tranche (calculated as the total nominal amount of the bank's securitization exposure(s) in the tranche) divided by the nominal amount of the tranche.
		(b)	For a bank that has securitization exposures that reside in different tranches of a given securitization, P equals the maximum proportion of interest across tranches, where the proportion of interest for each of the different tranches should be calculated as described above.
	(2)	Capital charge for underlying pool (KP):
		(a)	For an IRB pool, K_P equals K_IRB as defined in 22.2 to 22.13.
		(b)	For an SA pool, K_P equals K_SA as defined in 19.2 to 19.5.
		(c)	For a mixed pool, K_P equals the exposure-weighted average capital charge of the underlying pool using K_SA for the proportion of the underlying pool for which the bank cannot calculate K_IRB, and K_IRB for the proportion of the underlying pool for which a bank can calculate K_IRB
18.55	In applying the capital charge cap, the entire amount of any gain on sale and credit-enhancing interest-only strips arising from the securitization transaction must be deducted in accordance with SAMA Circular No. 341000015689, Date: 19 December 2012.