Updated Pillar 2 method for assessing flowback risk associated with securitisation

This memorandum replaces FI's memorandum from 2017, "FI's Pillar 2 capital assessment method for systemic risk associated with securitisation", where we made the assessment that securitisation and its potential risks primarily could create adverse effects for the overall credit supply. This was due to banks rarely having contractual obligations to extend/renew credits as they mature, even if the borrower continues to have a need for financing.

In this memorandum, however, FI makes the assessment that a bank, in addition to its contractual obligations, in most cases will offer financing to borrowers whose credits can no longer be financed through a securitisation. The banks do this to protect their brand, limit other reputational risks, and minimise credit losses. FI notes that support measures for borrowers that give rise to flowback risks are not covered by existing capital requirements. FI therefore takes the position that risks associated with securitisation for individual banks are not fully covered by existing capital requirements.

The updated method to assess flowback risks associated with securitisation will be applied to banks that perform traditional and synthetic securitisations where the terms for the transfer of significant credit risk to a third party are viewed to be met.

The method will be applied to banks where the flowback risk in an overall capital assessment is judged to be material. FI makes the assessment that this will initially apply to banks in Supervision Categories 1 and 2. In some exceptional cases, it may also apply to banks in Supervision Categories 3 and 4. After a separate assessment, the approach will also thus be applied to these banks.

FI intends to decide on an additional own funds requirement for flowback risks associated with securitisation if at least one of the two following conditions are met:

• the bank's total capital ratio decreases by at least 50 basis points during a future twelve-month period as a result of the flowback.
• the exposure amount for the bank's securitised credits exceeds 15 per cent of the bank's total exposures amount in relevant exposures classes.

Securitisations that are judged to entail low flowback risks will be exempt from the method.

A full translation of the memorandum will be published in due course.