Elderlake Partners

07 · Securitisation — hierarchy & SRT

Art 242–270a CRR · Reg 2017/2402

Purpose & history

Why the hierarchy is ordered this way

SEC-IRBA first: whoever can compute KIRB knows the pool best, and the p-factor even rewards that knowledge with a formula-driven p (a function of granularity N, LGD and maturity, floored at 0.3) usually below the SA's fixed 1.0. SEC-ERBA/IAA second: external or internal ratings where allowed — the EU inverted Basel's order here for rated positions, one of its quiet deviations. SEC-SA last: pool capital plus delinquency, no rating needed, p = 1. Below everything: 1250% for what cannot be assessed. The order is an information incentive — better data, lower p, less capital — which is also the honest reading of the June 2025 revival package: the EU deciding the information price was set too high for the market it wants.

Requirements

SRT — per transactionCommensurate-transfer demonstration (mezzanine ≥ 50% test or first-loss coverage), no embedded support, call features scrutinised; ECB SRT notification with lead time — a project, not a filing.
Retention & transparency (originator)5% net economic interest held for life; ESMA loan-level templates; no resecuritisation.
Due diligence (investor, Art 5)Documented pre-trade analysis and ongoing monitoring; holding the bond is a compliance obligation with its own capital penalty (up to 1250% for breach).
Method dataSEC-IRBA: loan-level KIRB capability incl. mixed pools; SEC-SA: KSA and W per pool per quarter; STS: criteria evidence + verification + notification.

Calculations

One pool, every approach — the hierarchy as arithmetic

Reference structure throughout: performing pool, average SA weight 100% → KSA = KA = 8%; under IRB the same pool yields KIRB = 6.5% (incl. expected loss). Tranches: junior 0–8%, mezzanine 8–16%, senior 16–100% — plus, for cross-approach comparison, one thick senior tranche attaching at 8%.

SEC-IRBA (p ≈ 0.38)
18%
senior 8–100%
SEC-ERBA (AAA, 3y)
17.5%
senior, rated
SEC-SA (p = 1)
≈109%
senior 8–100%
No method / no data
1250%
always available

Same senior tranche, four answers. The ladder monetises information: loan-level knowledge (IRBA) or a rating (ERBA) each cut capital ~6× vs the formula-only SA on this structure. Floors: 15% (10% STS) apply throughout.

1 · SEC-IRBA — own pool capital, formula-driven p

p = max( 0.3 ; A + B·(1/N) + C·KIRB + D·LGD + E·MT )
N effective number of exposures · LGD exposure-weighted average · MT tranche maturity (years, capped 1–5) · A…E supervisory lookups by wholesale/retail, senior/non-senior, granular/non-granular · 0.3 the p floor
Worked example — senior, granular, wholesale A = 0 · B = 3.56 · C = −1.85 · D = 0.55 · E = 0.07 · N = 50, KIRB = 6.5%, LGD = 40%, MT = 3
p = 3.56/50 − 1.85×0.065 + 0.55×0.40 + 0.07×3 = 0.071 − 0.120 + 0.220 + 0.210 = 0.38
Senior 8–100% via the SSFA on p·KIRB: a = −1/(0.38×0.065) = −40.4 · l = 0.015 · u = 0.935
K = (ea·u − ea·l)/(a·(u−l)) = 0.0147 → RW ≈ 18% (floor 15% not binding) → RWA on a €920m tranche ≈ €169m.

2 · SEC-ERBA / IAA — ratings where permitted

Worked example — rated senior tranche CQS1 senior: RW 15% at 1y, 20% at 5y → 3y tranche interpolates linearly: 15 + (20−15)×(3−1)/(5−1) = 17.5%
Non-senior tranches: table RW further adjusted for tranche thickness — thin mezzanines are penalised, thick ones relieved.
Grid shape: senior IG runs ~15–105%; by BB territory ~160–180%; the bottom of the scale meets 1250% — ratings buy granularity, not mercy.
IAA — ABCP's private ERBA For ABCP programme exposures (liquidity lines, LoCs), the sponsor's approved internal assessment maps to the ERBA grades — an internal rating standing in where public ones don't exist. Approval and mapping governance carry the weight.

3 · SEC-SA — pool capital plus delinquency, p fixed

Senior 16–100% · RW ≈ 44%
Mezz 8–16% · ≈ 790%
Junior 0–8% · 1250%
Exponential decay above KA; floor 15% waits below
Just above KA — near-deduction, fading fast
D ≤ KA = 8% → the tranche is the pool's expected capital

Non-STS, p = 1. The 8–100% comparison tranche averages ≈109% — it swallows the near-KA mass the 16% attachment escapes.

Worked example — the three tranches KA = (1−W)·KSA + W·0.5 = 8% (W = 0) · p = 1
Junior 0–8%: RW 1250% · Mezz 8–16%: ≈ 790% · Senior 16–100%: ≈ 44%
Total capital ≈ KA×(1+p) = 16% of the pool — p = 1 doubles pool capital as the price of tranching.
STS (p = 0.5): 12% · inside the output floor to 2032 (p = 0.5 / STS 0.25): 12% / 10%.
Delinquency bites the anchor Same pool, W = 10% delinquent: KA = 0.9×8% + 0.1×50% = 12.2% — every tranche re-prices upward from a bigger anchor; the junior cliff rises to 12.2% of the structure.

4 · The floor of the ladder — 1250% and penalties

No method, no data, no diligence Cannot compute KIRB or KSA, no eligible rating → 1250% · investor due-diligence failures (Art 5 SecReg) → penal risk-weight add-ons up to the same ceiling · NPE securitisations: senior floor 100% where the discount test (NRPPD ≥ 50%) is met · resecuritisation: p = 1.5, no STS, no ERBA — priced out rather than banned.

Changes & sources

  • Sources: Art 242–270a; SecReg 2017/2402 as amended 2021; EBA SRT report; ESMA disclosure ITS.
  • In motion: the June 2025 Commission package — p-factor cuts made permanent and extended, due-diligence simplification, LCR/insurer treatment — plus the SRT process review. Direction of travel: revival; watch calibration, not intent.

Independent analysis by Elderlake Partners, as at August 2026. Not legal, accounting or supervisory advice.