CRR3 Made Capital More Expensive — SRT Is How Banks Cope

Although overall securitisation volumes in the European Union remain relatively modest and well below their 2008 peak, one segment has experienced notable growth in recent years: transactions designed to achieve Significant Risk Transfer (SRT) and risk-weighted asset (RWA) reduction. In 2024, approximately 70 banks issued SRT securitisations in Europe, representing a total exposure of more than €200 billion.

Similar to other forms of securitisation, SRT transactions involve pooling financial assets and structuring the resulting portfolio into several tranches with varying levels of seniority and risk. Some or all of these tranches are then placed with investors such as insurance companies, asset managers, or other banks seeking new sources of yield and greater portfolio diversification across asset classes or geographies that would otherwise be difficult to access.

In a traditional securitisation, risk transfer is achieved through the sale of the underlying exposures to a Special Purpose Vehicle (SPV), which issues notes to investors. By contrast, more than 90% of SRT transactions are structured as synthetic securitisations - also referred to as on-balance-sheet securitisations. These are generally easier and more cost-effective to arrange, as they do not require the creation of an SPV. The underlying assets remain on the balance sheet of the originating institution, while credit protection - typically provided through a credit derivative or a financial guarantee - is purchased from investors to cover losses on the transferred tranche(s).

The figure below illustrates a standard SRT structure in which a mezzanine tranche is protected, while the senior tranche is retained by the originating bank. An equity tranche covering the expected loss of the underlying portfolio is also typically retained by the originator in order to reduce the overall cost of protection.

For traditional securitisations, the transfer of the underlying exposures to an SPV must be genuine, with no material clawback provisions and no retained control by the originator.

In the event of credit deterioration, the originator must have no obligation to improve the quality of the underlying pool or to increase the yield payable to investors.

A clean-up call option may be exercised solely at the discretion of the originator, and only when 10% or less of the original value of the underlying exposures remains unamortised. The call must not be structured in a way to avoid allocating losses to the investors.

When the conditions outlined above are met, the originating institution may apply the specific RWA calculation methodology set out in Article 247 of the CRR. In this case, the underlying exposures are excluded from the calculation of RWAs and expected losses. Instead, RWAs are determined at the level of the tranches retained by the originator. Where the bank retains different tranches, either fully or partially, each retained tranche is treated as a distinct exposure, and the corresponding RWA is calculated separately.

The originating institution may also opt to deduct its securitisation positions from its own funds, which is often advantageous for first-loss tranches otherwise subject to a 1.250% risk weight. Tranches whose credit risk has been transferred to third-party investors are excluded from the RWA calculation of the originator.

As a result of the SRT, the originating institution benefits from a significant reduction in its total RWAs. The RWA relief can be measured as the difference between the RWAs of the underlying portfolio prior to securitisation and those of the retained tranches. The capital cost associated with deducted positions may also be considered when determining the overall capital relief achieved.

Let’s consider an example in which Bank A issues an SRT transaction backed by a €2 billion pool of SME loans. The bank applies IRBA to this portfolio, with its internal models producing an average risk weight of 55%. Accordingly, the portfolio generates €1.1 billion in RWAs before securitisation.

As part of the securitisation, the bank divides the portfolio risk into three tranches: a senior tranche representing 92% of the securitised exposure, a mezzanine tranche representing 7.5%, and a first-loss tranche representing 0.5%. The bank also retains a vertical slice of 5% of the underlying portfolio in order to comply with the retention requirement.

After securitisation, the RWA are no longer calculated at the level of the underlying loans – except for the 5% vertical slice, but instead at the level of each tranche.

For the senior tranche, considering that the securitisation meets the STS criteria, the minimum 10% risk-weight floor must be achieved through appropriate structural optimisation.

The mezzanine tranche is fully protected by a credit protection via third-party investors, consequently, no RWAs are borne by the originating institution.

The first-loss tranche exposure of 0.5% (€9.5 million) is deducted from regulatory capital. To estimate the RWA equivalent, this amount may be divided by the bank’s capital-to-RWA ratio — assuming 12% for a G-SIB, this yields approximately €79 million. This example illustrates that capital deduction may be more beneficial than applying a 1,250% risk weight, which would result in €119 million of RWAs.

The retained part of loans within the 5% vertical slice is still risk-weighted as if it was not securitised, that is subject to a 55% risk-weight.

Thanks to this SRT transaction Bank A benefits from a €791 million RWA relief.