Al BF Ssfamethodv2 Jul13

In This Issue:
A Primer on the SSFA Method for

Calculating the Risk Weights for
Securitization Exposures Under
U.S. Basel III
Introduction
Hierarchy of Approaches for
Calculating Risk Weights for
Securitization Exposures
Overview of SSFA
Overview of KSSFA
Observations About SSFA
Conclusion
Client Alert
July 2013

A Primer on the SSFA Method for Calculating the
Risk Weights for Securitization Exposures Under
U.S. Basel III
Introduction
In July 2013, the Board of Governors of the Federal Reserve System (the FRB),
the Office of the Comptroller of the Currency (the OCC) and the Federal Deposit
Insurance Corporation (the FDIC) issued a set of final rules (the Final Rules)
designed to implement the Basel III capital standards in the United States.
1

Among other things, the Final Rules specify a minimum total capital ratio of 8%
for banking organizations.
2
This ratio is computed by dividing a banking
organization's total capital by its total risk-weighted assets.
Many banking organizations have assets consisting of investments in asset-
backed securities and other securitization exposures. Such investments and other
exposures must be considered when a banking organization calculates its total
risk-weighted assets as well as other capital ratios specified in the Final Rules.
The Final Rules contain new methods for determining the risk weights applicable
to securitization exposures. Consistent with the requirements of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), these
new methods eliminate the ratings-based methods currently utilized under Basel I
and Basel II.
This article focuses on the Simplified Supervisory Formula Approach (SSFA), a
method for calculating the risk weights for securitization exposures that will be
applicable to a wide range of banking organizations. As explained below, as
compared to the ratings-based capital rules of Basel I and Basel II, SSFA will lead
to generally higher risk weights, and therefore higher capital requirements, for
securitization exposures.
This article is organized as follows:
Hierarchy of Approaches for Calculating Risk Weights for Securitization
Exposures
Overview of SSFA
Overview of K
SSFA

Conclusion
Baker & McKenzie
2 A Primer on the SSFA Method for Calculating the Risk Weights for Securitization Exposures Under U.S. Basel III July 2013

Hierarchy of Approaches for Calculating Risk Weights for
Securitization Exposures
The Final Rules place banking organizations into different categories and specify
a hierarchy of risk weighting approaches to be utilized by banking organizations in
each category. The chart below summarizes these categories and approaches.
Approaches for
Calculating Risk-
Weighted Assets
Types of Banking
Organizations Covered
Hierarchy of Approaches
for Calculating Risk
Weights for Securitization
Exposures
3

Standardized
Approach
All banking organizations
1. Use either;
a. SSFA; or
b. if the banking
organization is not a
market risk banking
organization,
4
the
gross-up approach.
5

2. If the banking organization
cannot or chooses not to
apply the methods
described in #1 to a
securitization exposure,
assign a 1,250% risk
weight to the securitization
exposure.
Advanced
Approach
Any banking organization
that:
has consolidated
total assets of $250
billion or more; or
has consolidated
total on-balance
sheet foreign
exposure of $10
billion or more; or
is a subsidiary of a
banking organization
that uses the
advanced
approaches; or
elects to use the
advanced
approaches.
1. Use the supervisory
formula approach
(SFA).
6

does not qualify for SFA
under #1, use SSFA.
does not qualify for SFA
under #1 and does not
apply SSFA under #2,
assign a 1,250% risk
weight to the securitization
exposure.
Note that pursuant to the
capital floor imposed by the
Collins Amendment, any
banking organization using
the advanced approach to
calculate its risk-weighted
assets must also calculate its
risk-weighted assets under
the standardized approach
and apply the result that
yields the highest calculation
of risk-weighted assets (and
thus the lowest capital
ratios).
7

Market Risk Any banking organization
Baker & McKenzie

Approaches for
Calculating Risk-
Weighted Assets
Types of Banking
Organizations Covered
Hierarchy of Approaches
for Calculating Risk
Weights for Securitization
Exposures
3

Approach with aggregate trading
assets and liabilities equal
to:
10% or more of its
total assets; or
$1 billion or more.
A market risk banking
organization will utilize either
the standardized approach
or advanced approach in
calculating its risk weighted
assets except for those
securitization exposures and
other assets that constitute
short-term trading assets
(covered positions). The
risk weight for securitization
exposures and other assets
that constitute covered
positions is calculated in
accordance with the market
risk approach.
8

is not an advanced
approach banking
organization:
a. use SSFA; or
b. assign a specific risk-
weighting factor of
100%.
is an advanced approach
banking organization:
a. use SFA; or
b. if the banking
organization does not
qualify for SFA, either:
i. use SSFA; or
ii. assign a specific
risk-weighting
factor of 100%.

Overview of SSFA
The SSFA Method
As explained in further detail below, under SSFA, a capital cushion for the
securitization (K
A
) is calculated based on the capital requirement applicable to the
underlying securitized assets (typically 8%), as adjusted by the observed
performance of the underlying securitized assets. The SSFA method places the
tranches of a securitization capitalization structure into one of three categories:
(1) those tranches senior to K
A
;
(2) those tranches junior to K
A
; and
(3) the tranche that straddles K
A
(i.e., the tranche a portion of which is senior
to K
A
and a portion of which is junior to K
A
).
The SSFA method for calculating the risk weight (RW) of a particular
securitization tranche is as follows:
If tranche is junior to
K
A
:
RW = 1,250%
If tranche is senior to
K
A
:
RW = Greater of:
Baker & McKenzie

, %
; and
20% (supervisory floor)
If tranche straddles
K
A
:
RW = Greater of:

, % +
, %
;

The capital charge (i.e., the amount of capital required to be held against the
tranche as a percentage of its carrying value) equals RW times 8% (the total
capital requirement). For example:
if RW is 1,250%, the capital charge is 100% (1,250% times 8%) (i.e.,
dollar-for-dollar capital required);
if RW is 20%, the capital charge is 1.6% (20% times 8%); and
if RW is 1,250% times K
SSFA
, the capital charge is K
SSFA
% (1,250% times
K
SSFA
times 8%).
Step-by-Step Application of SSFA
The following chart presents a step-by-step application of the mathematical
expression of SSFA presented above. The first three steps relate to the pool of
securitized assets and the remaining steps relate to each tranche of the
securitization.
Step Description Calculation/Explanation
1 Determine K
G
for the pool of
securitized assets.
K
G
is the capital charge that the banking
organization would incur if it held the
securitized assets directly, rather than
securities backed by such assets. It can be
thought of as the baseline capital cushion
applicable to the securitization.
K
G
equals 8% for the types of consumer
assets most frequently securitized.
2 Calculate W for the pool of
securitized assets.
W is a ratio, the numerator of which is the
dollar amount of underlying securitized
assets that meet the criteria specified
below and the denominator of which is
total dollar amount of all underlying
securitized assets.
Criteria:
(i) ninety days or more past due;
(ii) subject to a bankruptcy or insolvency
Baker & McKenzie

proceeding;
(iii) in the process of foreclosure;
(iv) held as real estate owned;
(v) has contractually deferred interest
payments for 90 days or more;
9
or
(v) is in default.
3 Calculate K
A
for the pool of
securitized assets.
K
A
= (1-W)K
G
+ W(0.5)
K
A
can be thought of as adjusting the
baseline capital cushion (K
G
) to account for
the observed adverse performance of the
securitized assets (measured by W).
For that portion of the securitized
assets for which there is no observed
adverse performance (1-W), the
capital cushion continues to equal
the baseline (K
G
).
For that portion of the securitized
assets for which there is observed
adverse performance (W), the capital
cushion is equal to 50%.
4 Calculate the attachment
point (A) and detachment
point (D) for each tranche.
A = The attachment point for the tranche,
calculated as the ratio of the current dollar
amount of underlying exposures that are
subordinated to the exposure to the
current dollar amount of all underlying
exposures.
D = The detachment point for the tranche,
calculated as parameter A plus the ratio of
the current dollar amount of other tranches
that are pari passu with such tranche.
The attachment point (A) for a tranche is
that point in the capital structure at which
the tranche begins to absorb losses and
the detachment point (D) for a tranche is
that point in the capital structure at which
the tranche has become a total loss. The
points of the capital structure are simply
intervals in a range from 0% (the bottom of
the most junior tranche) to 100% (the top
of the most senior tranche).
The attachment and detachment points
denote (1) the tranche's relative level of
Baker & McKenzie

seniority in the capital structure and (2) the
thickness of the tranche (measured as D-
A). The relative level of seniority of a
tranche, as well as its thickness, are key
inputs in the SSFA method for determining
the risk weight of that tranche.
5 Identify whether the
tranche:
is junior to K
A

is senior to K
A
; and
straddles K
A
.
Mathematical expression:

D<K
A

A>K
A

A<K
A
<D
6 If the tranche is junior to
K
A
:
Assign a Risk Weight (RW)
of 1,250% for the tranche.
RW = 1,250%
Results in a capital charge for that tranche
equal to 100%
10
(i.e., bank must hold
dollar for dollar capital against that
tranche).
7 If the tranche is senior K
A
:
Calculate K
SSFA
for
the tranche; and
Assign a RW equal
to 1,250% x K
SSFA

for the tranche.
Note that
supervisory floor of
20% RW applies.
RW = greater of:
1,250% x K
SSFA
; and
K
SSFA
=
e
e
l
( l)

Results in a capital charge for that
tranche equal to the greater of (a)
K
SSFA
%
11
and (b) 1.6%.
12

For an explanation of K
SSFA
, see
discussion below under Overview of
K
SSFA
.
8 If the tranche straddles K
A
:
For the portion of the
tranche junior to K
A
,
assign a RW of
1,250%;
For the portion of the
tranche senior to K
A
:
o calculate K
SSFA

for such portion;
and
o assign a RW for
such portion
RW = greater of:

, % +
, %
; and
Results in a capital charge equal to (a)
100% for that portion of the tranche junior
to K
A
and (b) K
SSFA
% for that portion of the
tranche senior to K
A
.
Baker & McKenzie

equal to
1,250% x K
SSFA

for such portion.
The total RW for the
tranche is the sum of
the RWs for the two
portions as
described above.
Note that
supervisory floor of
20% RW applies.

To aid the reader in determining the approximate capital charge under SSFA for a
given tranche, Appendix A contains a chart showing the capital charge under
SSFA for tranches with attachment points (A) ranging from 0% to 100% and
tranche thicknesses (D-A) ranging from 2% to 40%, where K
G
= 8% and W = 0%.
Graphical Representation of Capital Charges Under SSFA
The following graph depicts the marginal capital charge at each point in the
capital structure under SSFA.
13

Capital Charges Under SSFA

Baker & McKenzie

Overview of K
SSFA

The K
SSFA
Formula
As noted above, K
SSFA
is used in determining the risk weight applicable to any
tranche (or portion thereof) senior to K
A
in the capital structure. K
SSFA
is equal to:
()
where,
1. K
G
= The weighted average total capital requirement of the underlying
securitized assets (8% in the case of most types of consumer assets).
2.
= (1 )
+ 0.5
3. W = The proportion of the underlying securitized assets that meet the
following criteria:
i. ninety days or more past due;
ii. subject to a bankruptcy or insolvency proceeding;
iii. in the process of foreclosure;
iv. held as real estate owned;
v. has contractually deferred interest payments for 90 days or more;
14

or
vi. is in default.
4. =
1

5. = An indicator variable that is 0.5 for securitizations that are not
resecuritization exposures and is 1.5 for resecuritization exposures.
6. =

7. = (
,
0)
8. A = The attachment point for the securitization exposure, calculated as
the ratio of the current dollar amount of underlying exposures that are
subordinated to the exposure to the current dollar amount of all
underlying exposures.
9. D = The detachment point for the securitization exposure, calculated as
parameter A plus the ratio of the current dollar amount of the
securitization exposures that are pari passu with such securitization
exposure.
10. e= 2.71828, the base of the natural logarithms.
Economic Basis of K
SSFA

The K
SSFA
formula derives from the mathematical approaches used in hedging. A
hedge is an investment or position that is designed to offset or otherwise protect
against changes in the value of an underlying exposure. Capital held by a banking
organization can be considered a hedge against unexpected changes in the value
of the investment against which such capital is held. The amount of capital (i.e.,
the amount of the hedge) as a proportion of the underlying exposure that is
protected by the capital (i.e., the hedge) is referred to as a hedge ratio.
Baker & McKenzie

Both the ratings-based approaches under Basel I and Basel II and K
SSFA
function
as hedge ratios in that they determine the amount of capital required to protect a
banking organization from unexpected changes in the credit profile of a
securitization exposure. However, unlike the ratings-based approaches, K
SSFA

utilizes hedging mathematics to dynamically adjust for changes in the condition of
the underlying exposure; i.e., K
SSFA
reflects changes in the credit quality of the
securitized assets (as measured by parameter W), thus providing hedge
protection against a greater range of contingencies as compared to the ratings-
based approaches (which are usually unaffected by small changes in credit
quality). As with any hedge, the greater the range of contingencies being hedged
against, the higher the cost of hedging will be (e.g., a hedge (insurance policy)
against the risk of a home being destroyed by fire is less costly than a hedge
against the risk of a home being damaged or destroyed by fire). Thus, K
SSFA

comes at the cost of generally higher capital charges when compared with the
ratings-based capital charges under Basel I and Basel II.
SSFA is Dynamic
SSFA risk weights for a given tranche can change as the performance of the
underlying securitized assets (measured by parameter W) changes and as the
attachment and detachment points for that tranche change over time. The ratings-
based methods of Basel I and Basel II (see Appendix B) produce static risk
weights for a given tranche (unless the rating of that tranche changes).
Performance of the underlying assets will drive changes in parameter W.
Such changes may be relatively more pronounced in securitizations of
subprime assets than in securitizations of prime assets. While the
performance of the underlying assets may lead to adjustments in the
credit rating of a tranche and thus the risk weight under Basel I and Basel
II, SSFA is clearly much more sensitive to changes in the performance of
the underlying securitized assets.
A transaction's priority of payments will drive changes in the attachment
and detachment points of a particular tranche. For example, a sequential
pay transaction will result in gradually higher attachment and detachment
points as the transaction de-levers. Thus, the risk weighting of a
subordinated tranche may decline dramatically as its relative position in
the capital structure improves. Risk weights under Basel I and Basel II do
not adjust as a transaction de-levers, except in those instances where the
rating of a subordinate tranche is increased as its relative position in the
capital structure improves.
SSFA Leads to Generally Higher Capital Charges than Basel I and
Basel II
As compared with Basel I and Basel II, SSFA generally results in somewhat
higher capital charges for very senior tranches and much higher capital charges
for the subordinated tranches. These results are significantly pronounced with
respect to securitizations that have low attachment points. For example, a prime
auto loan securitization will have a relatively small residual interest and thus the
tranches will generally attach at a much lower level than is the case in a subprime
auto loan securitization, in which the residual interest is typically larger. The
following table illustrates this effect with respect to a recent subprime auto loan
securitization and a recent prime auto loan securitization.
Baker & McKenzie

Tranche
(Sequential
Pay)
Attachment
%
(A)
Basel I
Capital
Charge
Basel II
Capital
Charge
SSFA
Capital
Charge
15

Class A-1
Rated A-1
Subprime Auto: 81.51% 1.60% 0.56% 1.60%
Prime Auto: 78.41% 1.60% 0.56% 1.60%
Class A-2
Rated AAA
Subprime Auto: 48.53% 1.60% 0.96% 1.60%
Prime Auto: 46.27% 1.60% 0.96% 1.60%
Class A-3
Rated AAA
Subprime Auto: 32.70% 1.60% 0.96% 1.60%
Prime Auto: 16.24% 1.60% 0.96% 1.70%
Class A-4
Rated AAA
Subprime Auto: N/A
Prime Auto: 7.64% 1.60% 0.96% 44.77%
Class B
Rated AA
Subprime Auto: 25.45% 1.60% 1.20% 1.60%
Prime Auto: 4.73% 1.60% 1.20% 100.00%
Class C
Rated A
Subprime Auto: 16.45% 4.00% 1.60% 4.81%
Prime Auto: 2.78% 4.00% 1.60% 100.00%
Class D
Rated BBB
Subprime Auto: 7.60% 8.00% 6.00% 44.25%
Prime Auto: 0.84% 8.00% 6.00% 100.00%
Class E
Rated BB
Subprime Auto: 5.25% 16.00% 34.00% 100.00%
Prime Auto: N/A

As noted above under Overview of K
SSFA
-- Economic Basis of K
SSFA
, K
SSFA

hedges against a wider range of contingencies (any change in parameter W)
than do the ratings-based approaches (only changes in the credit rating). Some
portion of the generally higher capital charges under SSFA can be attributed to
this difference, as the cost of hedging against a wider range of contingencies is
generally higher than the cost of hedging against fewer contingencies.
SSFA Can Lead to Anomalous Results Due to a Fixed K
G

As explained above, SSFA utilizes K
G
as the baseline capital cushion for a
securitization transaction. For the types of consumer assets that are most
frequently securitized, K
G
is 8% regardless of the credit quality of the underlying
assets. The fixed K
G
, when coupled with the different attachment and detachment
points for comparably-rated tranches in different types of transactions, has the
potential to lead to anomalous results.
For example, the initial SSFA capital charge for the Class A-4 AAA-rated
tranche in the prime auto securitization referenced above (44.77%) is about the
same as the initial SSFA capital charge for the Class D BBB-rated tranche in the
subprime auto securitization referenced above (44.25%). Had K
G
been set at 4%
rather than 8% for the prime auto securitization, the initial SSFA capital charge for
the Class A-4 tranche would be only 3.72%. Although the anomaly will correct
itself, to some extent, as parameter W increases over time for the subprime
transaction relative to the prime transaction, it is difficult to rationalize a similar
capital charge for those two tranches at any point in time.
Baker & McKenzie

SSFA Applies Unevenly Across the Capital Structure
SSFA does not provide a smooth continuum of risk weights and capital charges
across all tranches of a securitization. Rather, SSFA divides the capital structure
into four distinct domains:
(1) the dollar-for-dollar domain (consisting of those tranches junior to K
A
, for
which dollar-for-dollar capital is required);
(2) the partial K
SSFA
domain (consisting of the tranche that straddles K
A
, for
which (a) dollar-for-dollar capital is required for the portion of such
tranche junior to K
A
and (b) the K
SSFA
formula applies in determining the
risk weight and capital charge for the portion of such tranche senior to
K
A
);
(3) the full K
SSFA
domain (consisting of those tranches senior to K
A
for which
the K
SSFA
formula applies in determining the risk weight and capital
charge); and
(4) the supervisory floor domain (those tranches for which the 20% risk
weight / 1.6% capital charge supervisory floor applies).
These distinct domains, and their respective methods for calculating risk weights
and capital charges, can lead to cliff effects and generally uneven results in
instances where a tranche migrates across domains as its attachment and
detachment points change. Moreover, changes in credit quality (measured by
changes in parameter W) have a substantial effect on risk weights and capital
charges for tranches in the partial K
SSFA
domain and the full K
SSFA
domain, but
have no effect in the dollar-for-dollar domain and have no effect in the supervisory
floor domain unless the changes are severe enough to cause the K
SSFA

calculation to exceed the supervisory floor.
Conclusion
The elimination of the ratings-based approaches under Basel I and Basel II
represents a significant change in the way that risk weights for securitization
exposures are determined in the United States. Although the reliance on
sometimes unreliable ratings is an obvious shortcoming of the ratings-based
approaches, SSFA has its own shortcomings as noted above. Over time, it is
likely that SSFA will have a material impact on the capital charges associated with
the securitization exposures of banking organizations.
www.bakermckenzie.com

For further information please
contact
Christopher B. Horn
Partner
Baker & McKenzie LLP
New York, NY
1 212 626 4631
christopher.horn@bakermckenzie.com
Erica Khalili
Associate
Baker & McKenzie LLP
New York, NY
1 212 626 4223
erica.khalili@bakermckenzie.com
Nigel Thavasi, PhD
Economic Analyst
Baker & McKenzie Economic
Consulting LLC
Palo Alto, CA
1 650 251 5920
nigel.thavasi@bakermckenzie.com

Baker & McKenzie

Appendix A
SSFA Capital Charges (expressed as a percentage) for:

Attachment Points (A): 0% to 100%
Tranche Thicknesses (D-A): 2% to 40%
Attachment Points (A)
D-A 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24%100%
2% 100.00 100.00 100.00 100.00 78.69 47.73 28.95 17.56 10.65 6.46 3.92 2.38 1.60
4% 100.00 100.00 100.00 89.35 63.21 38.34 23.25 14.10 8.55 5.19 3.15 1.91 1.60
6% 100.00 100.00 92.90 75.47 51.79 31.41 19.05 11.56 7.01 4.25 2.58 1.60 1.60
8% 100.00 94.67 81.61 63.84 43.23 26.22 15.90 9.65 5.85 3.55 2.15 1.60 1.60
10% 95.74 85.28 71.07 54.59 36.72 22.27 13.51 8.19 4.97 3.01 1.83 1.60 1.60
12% 87.74 75.90 62.16 47.26 31.67 19.21 11.65 7.07 4.29 2.60 1.60 1.60 1.60
14% 79.34 67.56 54.80 41.43 27.71 16.81 10.19 6.18 3.75 2.27 1.60 1.60 1.60
16% 71.62 60.45 48.76 36.75 24.54 14.89 9.03 5.48 3.32 2.01 1.60 1.60 1.60
18% 64.84 54.45 43.77 32.93 21.98 13.33 8.08 4.90 2.97 1.80 1.60 1.60 1.60
20% 59.00 49.40 39.63 29.78 19.87 12.05 7.31 4.43 2.69 1.63 1.60 1.60 1.60
22% 54.00 45.12 36.16 27.15 18.11 10.98 6.66 4.04 2.45 1.60 1.60 1.60 1.60
24% 49.69 41.48 33.22 24.93 16.63 10.08 6.12 3.71 2.25 1.60 1.60 1.60 1.60
26% 45.98 38.36 30.71 23.04 15.36 9.32 5.65 3.43 2.08 1.60 1.60 1.60 1.60
28% 42.76 35.66 28.54 21.41 14.27 8.66 5.25 3.18 1.93 1.60 1.60 1.60 1.60
30% 39.95 33.30 26.65 19.99 13.33 8.08 4.90 2.97 1.80 1.60 1.60 1.60 1.60
32% 37.47 31.23 24.99 18.74 12.50 7.58 4.60 2.79 1.69 1.60 1.60 1.60 1.60
34% 35.28 29.40 23.52 17.64 11.76 7.13 4.33 2.62 1.60 1.60 1.60 1.60 1.60
36% 33.32 27.77 22.22 16.66 11.11 6.74 4.09 2.48 1.60 1.60 1.60 1.60 1.60
38% 31.57 26.31 21.05 15.79 10.53 6.38 3.87 2.35 1.60 1.60 1.60 1.60 1.60
40% 30.00 25.00 20.00 15.00 10.00 6.07 3.68 2.23 1.60 1.60 1.60 1.60 1.60

Assumes KG = 8% and W = 0%. The capital charge is calculated as 8% (the total capital ratio
requirement) times the SSFA risk weight.
Baker & McKenzie

Appendix B
Risk Weights for Securitization Exposures under Basel I and Basel II
Basel II
Rating Basel I Senior,
Granular
Non-Senior,
Granular
Non-
Granular
AAA 20% 7% 12% 20%
AA 20% 8% 15% 25%
A+ 50% 10% 18% 35%
A 50% 12% 20% 35%
A- 50% 20% 35% 35%
BBB+ 100% 35% 50% 50%
BBB 100% 60% 75% 75%
BBB- 100% 100% 100% 100%
BB+ 200% 250% 250% 250%
BB 200% 425% 425% 425%
BB- 200% 650% 650% 650%

Baker & McKenzie

Endnotes

1
For the interim final rule published by the FRB and the OCC, see
http://www.federalreserve.gov/bcreg20130702a.pdf. For the interim final rule adopted by the FDIC,
see http://www.fdic.gov/news/board/2013/2013-07-09_notice_dis_a_res.pdf?source=govdelivery .
These interim final rules will be reconciled and published as final rules in the Federal Register.
2
Total capital is the sum of common equity tier one capital, additional tier one capital and tier two
capital.
Common equity tier one capital consists of common stock instruments plus retained
earnings plus accumulated other comprehensive income plus common equity tier one
minority interest, subject to certain limitations minus any gain-on-sale associated with a
securitization exposure minus other specified regulatory adjustments and deductions.
Additional tier one capital consists of subordinated capital instruments (plus any related
surplus) that are issued and paid, have no maturity and that meet other specified criteria
plus tier one minority interest, subject to certain limitations minus specified regulatory
adjustments and deductions.
Tier two capital consists of subordinated capital instruments (plus any related surplus) that
are issued and paid, have a minimum original maturity date of at least five years and that
meet other specified criteria plus total capital minority interest, subject to certain limitations
plus allowance for loan and lease losses (ALLL) up to 1.25% of the banking organization's
standardized total risk-weighted assets not including any amount of the ALLL (and excluding
in the case of a market risk banking organization, its standardized market risk-weighted
assets) minus specified regulatory adjustments and deductions.
3
Before applying any of the risk-weighted approaches, a banking organization must deduct from its
common equity tier one capital any after-tax gain-on-sale resulting from a securitization and apply a
1,250% risk weight to the portion of a credit enhancing interest-only strip that does not constitute
after-tax gain-on-sale.
4
A market risk banking organization is any banking organization with aggregate trading assets and
liabilities equal to: (1) 10% or more of its total assets or (2) $1 billion or more.
5
A banking organization must apply either the SSFA or the gross-up approach consistently across all
of its securitization exposures. The gross-up approach utilizes four inputs: (1) the pro-rata share (the
par value of the banking organization's securitization exposure as a percentage of the par value of the
tranche in which the securitization exposure resides), (2) the exposure amount, (3) the enhancement
amount (the par value of all tranches that are more senior to the tranche in which the securitization
exposure resides) and (4) the applicable risk weight (the weighted-average risk weight of the
underlying exposures in the securitized pool). Under the gross-up approach, a banking organization
would calculate the "credit equivalent amount," which equals (a) the sum of the exposure amount of
the banking organization's securitization exposure and (b) the pro-rata share times the enhancement
amount. To calculate the risk weight for a securitization exposure under the gross up approach, the
banking organization must apply the applicable risk weight to the credit equivalent amount.
6
The SFA is based on a complex formula that utilizes seven inputs: (1) amount of the underlying
exposures, (2) the securitization exposure's proportion of the tranche in which the securitization
exposure resides, (3) the sum of the risk-based capital requirements and expected credit losses for
the underlying exposures divided by the amount of the underlying exposures (KIRB), (4) the tranche's
credit enhancement level, (5) the tranche's thickness, (6) the number of underlying securitization
exposures and (7) the securitization exposure's weighted average loss given default.
7
The Collins Amendment refers to Section 171 of the Dodd-Frank Act. That provision requires the
appropriate Federal banking agencies to establish minimum leverage and capital requirements on a
consolidated basis for insured depository institutions, depository institution holding companies, and
nonbank financial companies supervised by the FRB. These minimum leverage and capital
requirements may not be less than the generally applicable leverage capital requirements, which are
to serve as a floor for any capital requirements that the agency may require, nor quantitatively lower
than the generally applicable leverage and capital requirements that were in effect for insured
depository institutions as of the date of enactment of the Dodd-Frank Act.
8
The market risk approach contains various adjustments based on market-based variables. Those
adjustments are beyond the scope of this article.

Baker & McKenzie


2013 Baker & McKenzie. All rights reserved. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service
organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm.
This may qualify as Attorney Advertising requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.

9
Criteria excludes principal or interest payments deferred on: (1) federally-guaranteed student loans,
in accordance with the terms of those guarantee programs and (2) consumer loans, including non-
federally-guaranteed student loans, provided that such payments are deferred pursuant to provisions
included in the contract at the time funds are disbursed that provide for periods of deferral that are not
initiated based on changes in the creditworthiness of the borrower.
10
Criteria excludes principal or interest payments deferred on: (1) federally-guaranteed student loans,
in accordance with the terms of those guarantee programs and (2) consumer loans, including non-
federally-guaranteed student loans, provided that such payments are deferred pursuant to provisions
included in the contract at the time funds are disbursed that provide for periods of deferral that are not
initiated based on changes in the creditworthiness of the borrower.
11
8% * (1,250%*KSSFA) = KSSFA%
12
8% * 20% = 1.6%

13
The graph assumes that KG equals 8% and that parameter W equals 0%.
14
See note above regarding types of principal and interest payments excluded from these criteria.
15
The figures presented do not take into account funds on deposit in the reserve account and assume
that parameter W equals 0%.

Al BF Ssfamethodv2 Jul13

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Al BF Ssfamethodv2 Jul13

Transféré par

Droits d'auteur :

Formats disponibles

In This Issue:

A Primer on the SSFA Method for

Vous aimerez peut-être aussi