BASEL II -securatization

[ravishankar80]

Hi David,

Wanted to clarify on treatment of securitization exposures under BASEL II. I am not very clear on the difference between the Standardized approach and the IRB approach which uses RBA-Ratings Based Approach. Both seem to use credit ratings and apply the risk weights accordingly. So where is the difference ? Thanks in advance

Ravi

 

[David Harper CFA FRM]

Hi Ravi,

A bit of background on Basel II securitization is here. In a basic sense, I agree with you, they are similar as both multiply an exposure by risk weight. But the IRB is more granular and gives the prospect for a lower capital charge. I copied below the risk weights from Basel II; the first (top panel) refers to standardized approach and below (lower panel in yellow highlight) is the IRB. Notice the senior tranche AAA, for example, is only 7% (although given events, let's expect some revision! We now understand that AAA structured didn't mean the same thing as corporate issue AAA, to put it kindly)....David

 

[shanlane]

Hello,

I had a very similar question, but I was just hoping to get a quick description of the differences between RBA, SF and IAA. By the way, one of the links up here is broken.

Schwesser gives a horrible description for the RBA:

"This approach must be used by any IRB bank that has an external rating of its risk assessment. The RBA treats investors and originators the same."

If there is any way you could explain this (or explain it in a different way) it would be great.

Thanks!

Shannon