Slide 1: Basel III
Basel III Standard Approach and Rating Based Approach June 2018
Slide 2: Introduction
Introduction Mike Mueller, Senior Director, Content Solutions – Structured 13 years of experience at Moody’s Investors Service (MIS) leading the development of structured finance credit rating models Deep experience in multiple asset classes including European residential mortgages, global lever
Slide 3: Agenda
Agenda 1. Basel III Methodology for Structured Finance 2. Internal Rating-Based Approach (IRBA) 3. External Rating-Based Approach (ERBA) 4. Standardized Approach 5. Internal Assessment Approach (IAA) for ABCP conduits 6. Q&A Basel III Solutions 3
Slide 4: Basel III Methodology for Structured Finance
1 Basel III Methodology for Structured Finance
Slide 5: Basel III Hierarchy
Basel III Hierarchy Internal Ratings-Based » Internal Ratings-Based Approach (IRBA): Approach (IRBA) applied if sufficient information is available to determine capital charges for the pool of underlying exposures External Ratings-Based » External Ratings-Based Approach (ERBA): Approach (ERBA) appli
Slide 6: STC
STC The most recent July 2016 update of the Basel Committee securitization standard specifies alternative capital treatment for securitizations that meet the STC criteria. Under all three approaches in the hierarchy, the risk weight for STC-complaint securitizations is subject to a floor of 10%
Slide 7: Integrated Solution for Basel III
Integrated Solution for Basel III Macro Cash Economic Credit Advanced Data Flow and IR Models Analytics Models Models • MA Alternative and • Historical • Asset Class • Deal Specific • Bond and Custom Scenarios Performance and Specific Credit Waterfall Models Collateral Cash Reference Data Model Flow
Slide 8: Basel III Delivery Options
Basel III Delivery Options Web Data Excel Desktop APIs Portal Feeds Add-In Economics, Credit and Structured Solutions Basel III Solutions 8
Slide 9: Internal Rating-Based Approach
2 Internal Rating- Based Approach
Slide 10: Required Data for Basel III IRB
Required Data for Basel III IRB In the IRBA the capital requirement depends on the credit enhancement level and tranche thickness, along with the calculation of KIRB. In addition, the capital charge would be based on certain inputs that determine the “p” parameter. PARAMETER EXPLANATION AP Attachm
Slide 11: IRBA – Mechanics
IRBA – Mechanics The supervisory parameter will depend on the pool LGD and the tranche Maturity: Kssfa will be calculated based on the Kirb and the p: Finally, the risk weight will depend on Kirb, Kssfa and the tranche AP and DP: Basel III Solutions 11
Slide 12: IRBA – Methodology
IRBA – Methodology Macroeconomic Scenarios Forecasts and stress scenarios S1: Stronger Recovery (30%) Credit Models Deal Models BL: Baseline (40%) S3: Double Dip (30%) Pool/Loan Level models Deal performance Underlying PD/LGD/EAD Deal structure Data Pool Expected Loss Cash flow projections (Pool / L
Slide 13: Pool Level E(L) Loan Level E(L)
Credit Model: Mortgage Portfolio Analyzer FACTORS MODELS OUTPUT Economic Data (Simulated or Default Pool Level E(L) Loan Level E(L) Realized) Loan Level Pool Data Severity (User Data) Supplemental User Data (Pool Prepayment performance, etc.) Basel III Solutions 13
Slide 14: Training Data Example: UK RMBS
Training Data Example: UK RMBS » Loan Level RMBS Data: EDW data and proprietary, collected by Moody’s Analytics » Loan level characteristics and monthly performance data: More than 2.2 million loans and 75 million observations Loan & Borrower Characteristics: Macroeconomic Data: » Mortgage type, pay
Slide 15: Macroeconomic scenarios
Macroeconomic scenarios » Macroeconomic Model (1800+ variables) » Historical data for over 160 countries » Forecasts for over 70 countries » Baseline & over a dozen alternative scenarios Basel III Solutions 15
Slide 16: External Rating-Based Approach
3 External Rating- Based Approach
Slide 17: Required Data for Basel III ERBA
Required Data for Basel III ERBA ERBA assigns risk weights to rated securitization exposures based in part on qualifying CRA ratings ERBA risk weights are determined using a formula based on qualifying CRA ratings, tranche seniority, interpolation for tranche maturities between 1-5 years, and ad
Slide 18: ERBA – Risk-Weights
ERBA – Risk-Weights Basel III Solutions 18
Slide 19: ERBA – Results
ERBA – Results Users can adjust risk weight boundaries at each rating level and perform notch-based what-if scenarios, measuring the risk weight impact of potential rating upgrades/downgrades at security level Basel III Solutions 19
Slide 20: Standardized Approach
4 Standardized Approach
Slide 21: Required Data for Basel III SEC-SA
Required Data for Basel III SEC-SA SEC-SA is similar to the US Simplified Supervisory Formula Approach (SSFA), determining the risk weight of a securitization exposure using a formula based on: PARAMETER EXPLANATION AP Attachment Point DP Detachment Point W Delinquency ratio of the underlying pool
Slide 22: SEC-SA – Mechanics
SEC-SA – Mechanics Ksa and W are used to calculate Ka, the augmented value of Ksa, which reflects the observed credit quality of the underlying pool of exposures. Ka is defined below. The values of parameters A and D, relative to Ka, determine the specific risk-weighting factor assigned to a pos
Slide 23: SEC-SA – Results
SEC-SA – Results Users can review data components for each metric used in the final result calculation Users can adjust the risk weight impact of multiple factors, including performance metrics and Kg categories across sub-asset classes Basel III Solutions 23
Slide 24: IAA
5 IAA
Slide 25: Internal Assessment Approach
Internal Assessment Approach For ABCP conduits the CRR bank regulation allows banks to apply a tailored method to determine the capital charge, the so called Internal Assessment Approach (“IAA”), provided the regulator has granted permission. The IAA consists in developing rating models to deriv
Slide 26: Off-the shelf CRA implementations
Off-the shelf CRA implementations Product Methodology RiskCalc Credit Model: CLO, SME Moody’s CDOROM Credit Model: CLO, SME, Trade Receivable Deal Model: Synthetic or simple synthetic-like structures CDOEdge Deal Model: CLO, SME SFW Deal Model: ABS, RMBS, CMBS Basel III Solutions 26
Slide 27: Q&A
7 Q&A
Slide 28: Domitille de Coincy and Mike Mueller, Moody's Analytics
Domitille de Coincy Mike Mueller Associate Director Senior Director Moody’s Analytics Moody’s Analytics One Canada Square One Canada Square London, United Kingdom London, United Kingdom +44 207 772 5291 tel +44 207 772 5553 tel +44 781 183 7979 mob Domitille.deCoincy@moodys.com Mike.Mueller@moodys.c
Slide 29: Basel III Solutions
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