As part of its effort to help financial institutions calculate their risk-based capital requirements for securitization exposures and reduce potential burdens, the Federal Deposit Insurance Corp. (FDIC) published on Feb. 11 a simplified supervisory formula approach (SSFA) tool that banks may use under the revised capital rules (12 CFR Part 324 and Basel III).
The tool applies to all FDIC-supervised banks and savings associations, including community institutions, and requires five inputs:
- Kg: This is the weighted-average capital requirement of the underlying exposures in the pool (including part-due exposures) calculated using the Standardized Approach as if the exposures were not securitized;
- W variable: This is the percentage of the pool that is 90 or more days delinquent, including assets in bankruptcy, insolvency proceedings, REO, process of foreclosure or similar status (for example, a W of 0.052 should be entered as 5.2 percent);
- Attachment point: The attachment point of a tranche is the percentage of the total securitization tool subordinate to that tranche, the position of the tranche in the deal structure where the tranche begins to experience losses;
- Detachment point: This is the position of the tranche in the deal structure where credit losses result in a complete loss of principal, expressed as a percentage, and is calculated by adding the attachment point and the thickness of the tranche (the thickness of the tranche is calculated by dividing the dollar value of tranche and all positions pari-passu with it by the value of underlying pool exposures); and
- P-value: When calculating this, select 0.5 if the pool is a securitization and select 1.5 if it is a re-securitization.
An optional input includes exposure amount, which is the dollar value of the exposure.
When calculating the Kg, the FDIC advised that a 100 percent risk weight corresponds to an 8 percent capital requirement; for example, the Kg would be 0.04, or 4 percent, if all of the underlying exposures had a 50 percent risk weight.
The FDIC also noted that both the attachment and detachment points may change over time as losses, prepayments and overcollateralization alter the total deal structures, so information should be entered from the most recent servicer report or similar information.