Module: | MODULE B: RISK MANAGEMENT
Q310: Consider the following statements regarding the Securitisation Framework under Pillar 1 of Basel II:
1. A bank acting purely as an investor in securitized tranches is totally exempt from holding any regulatory capital against those exposures.
2. The originator bank must hold regulatory capital against any retained securitization exposures, determined primarily by the external credit rating of those specific tranches.
3. Unrated securitization tranches retained by the originating bank must generally be deducted fully from its regulatory capital.
Which of the statements given above is/are correct?
2. The originator bank must hold regulatory capital against any retained securitization exposures, determined primarily by the external credit rating of those specific tranches.
3. Unrated securitization tranches retained by the originating bank must generally be deducted fully from its regulatory capital.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is incorrect: Under the Basel II framework, any bank holding a securitization exposure—whether acting as the originator, a sponsor, or merely a third-party investor—must hold regulatory capital against that exposure.
Statement 2 is correct: The originator bank that retains parts of the securitized pool (tranches) must calculate its capital charge based on the external credit ratings assigned to those specific retained tranches by approved rating agencies.
Statement 3 is correct: To penalize opacity and prevent banks from hiding bad assets, the framework mandates that any retained securitization tranche that remains unrated by an external agency must generally be fully deducted (100% deduction) from the bank's regulatory capital, rather than just being assigned a high risk weight.
Statement 2 is correct: The originator bank that retains parts of the securitized pool (tranches) must calculate its capital charge based on the external credit ratings assigned to those specific retained tranches by approved rating agencies.
Statement 3 is correct: To penalize opacity and prevent banks from hiding bad assets, the framework mandates that any retained securitization tranche that remains unrated by an external agency must generally be fully deducted (100% deduction) from the bank's regulatory capital, rather than just being assigned a high risk weight.