The securitisation framework · RiskAtoms Academy

By the end you will be able to

1Choose the approach for a securitisation position: SEC-IRBA, SEC-ERBA or SEC-SA, or 1250%.
2Compute a tranche's risk weight from KIRB or KSA, the p parameter and its attachment and detachment points, and say which floor or cap binds.
3Explain what the STS label and re-securitisation do to capital.
4Test a deal for significant risk transfer and work out the originator's capital relief.

Why it matters

RiskAtoms Bank plc packages £1,170.9m of its corporate loans into four tranches. If it sells the two middle ones, its RWA for the pool fall from £699.1m to £588.4m. If it sells only the upper middle one, they do not fall at all, although it has sold £82.0m of risk to an investor. Same pool, same buyers. The securitisation framework decides which positions carry capital, how much, and when the bank can stop holding capital for the loans it has sold.

Core explanation

Capital by the slice

L1.4.11: Securitisation basics showed how a pool of loans is sold to a special purpose vehicle and funded by tranches, and how losses run up from the bottom. It promised that the Basel framework sets capital by a tranche's seniority, its thickness and the quality of the pool, with more for re-securitisations. This lesson keeps that promise, on an illustrative deal made from the bank's own loans.

Illustrative dataRiskAtoms Bank plc's capital book

The same made-up UK bank as Level 3: £67bn of assets and £4bn of equity at 31 December 2025, in £ millions. Module 4.1 adds its regulatory layer: own funds, deductions, risk-weighted assets by risk type, buffers, the leverage exposure and MREL, computed from the Level 3 credit, trading, derivatives and operational risk books. Every figure is illustrative, not any bank's data.

Pro forma. The book applies Basel 3.1, the 2017 finalisation of Basel III, to the 31 December 2025 balance sheet. On that date the bank still reported under the old UK CRR. The UK applies Basel 3.1 from 1 January 2027, and the internal model approach for market risk from 1 January 2028 (PRA PS1/26, paras 1.23 and 1.24). So the book shows the bank as it would look under the new rules.

Illustrative deal. The book has no securitisation. The corporate pool takes 10% of every senior drawn loan, keeping each borrower's PD and F-IRB LGD; it is taken to stand for N = 120 loans. The tranches and ratings are assumptions (Module 4.2 shared code, securitisation.ts).

The pool's own capital

Everything starts from what the pool would need if it were not securitised. For an IRB bank that is KIRB, the IRB capital of L4.2.05: The IRB risk-weight formula including expected loss; for a standardised bank it is KSA, 8% of the pool's average SA risk weight, adjusted to KA for loans in arrears.

Corporate pool	Value
Amount	£1,170.9m
KIRB = UL + EL capital per £1	4.44% + 0.33% = 4.78%
KSA = KA (no loans in arrears, W = 0)	7.23%
Average LGD	31.6%
Effective number of loans N (assumed)	120
Tranche maturity MT (years, drawn-weighted remaining life)	4.09

Which approach

ExploreThe hierarchy (CRE40.41–40.48)

Click each step to see when it applies.

SEC-IRBA

First choice. A bank must use it when the pool is of a type it has IRB approval for and it can compute KIRB (CRE40.42). The bank's own corporate pool qualifies.

Where the tranche sits

A tranche's attachment and detachment points, A and D, are its seniority and, between them, its thickness. Compare them with K:

D ≤ K: the tranche sits inside the pool's own capital and takes 1250%. Class Z, 0–3% against KIRB of 4.78%, is here.
A < K < D: the part below K takes 1250%, the rest the supervisory formula. Class C, 3–8%, has 36% of its width below K, so its weight is 880.3%.
A ≥ K: the supervisory formula alone, falling fast as A rises, down to the 15% floor (CRE44.26).

How fast it falls is set by p. Under SEC-IRBA p depends on the pool's granularity, KIRB, LGD and the tranche's maturity (CRE44.17); for Class B it is 0.487. On the four tranches:

Not STS. Ratings are assumed; SEC-ERBA does not apply to the unrated first loss
Tranche	A–D	Size	SEC-IRBA	SEC-SA	SEC-ERBA	Rating
Class A (senior)	15%–100%	995.3	15.0%	36.3%	18.9%	AAA
Class B (mezzanine)	8%–15%	82.0	98.9%	720.2%	146.2%	A
Class C (mezzanine)	3%–8%	58.5	880.3%	1,240.2%	691.6%	BB
Class Z (first loss)	0%–3%	35.1	1,250.0%	1,250.0%	n/a	unrated

SEC-SA is harsher than SEC-IRBA here because KSA (7.23%) is higher than KIRB (4.78%): the SA weights these loans more heavily than the models do, and SEC-SA's p of 1 is above SEC-IRBA's. Add up the tranches and the deal carries RWA of £1,184.8m, against £699.1m for the pool unsecuritised: the framework deliberately charges more for risk held in tranches. The caps stop an originator ever holding more than the pool needed before (CRE40.52–40.54).

STS and its floors

Basel's simple, transparent and comparable criteria (CRE40.66–40.95), in the EU and UK the STS label, cut capital for traditional deals that meet them: SEC-SA's p halves to 0.5 (CRE41.21); SEC-IRBA's p is halved, still at least 0.3 (CRE44.28); SEC-ERBA has its own lower table (CRE42.13). Senior tranches get a 10% floor, non-senior keep 15% (CRE41.22, CRE44.29). Class A falls from 15% to 10%, and Class B under SEC-IRBA from 98.9% to 26.8%.

Re-securitisation

A re-securitisation pools tranches of other deals. The collateralised debt obligations of asset-backed securities at the centre of 2008 were of this kind (M7.4: Crisis case studies). They must use SEC-SA (CRE40.48) with p = 1.5 (CRE41.16) and a 100% floor (CRE41.18), and the caps do not apply (CRE41.19).

Sort itRe-securitisation or not?

Which of these positions is a re-securitisation (CRE40.5)?

A mezzanine note of a CDO whose pool is RMBS and CMBS tranches
A senior note of an RMBS backed by UK home loans
A CLO note backed by leveraged loans to companies
A tranche of a pool of auto loans that also holds one ABS tranche
A tranche re-cut from one RMBS tranche, whose cash flows a pool of the mortgages alone could replicate

Significant risk transfer

An originator may drop the securitised loans from its RWA, and hold capital only for the positions it keeps, only if significant credit risk has passed to third parties, it keeps no effective control, and the deal is legally sound (CRE40.24). Basel leaves “significant” to supervisors. The UK spells out two tests: the originator may keep no more than 50% of the risk-weighted exposure of the mezzanine positions or, where there are none and the first loss well exceeds expected losses, no more than 20% of the first loss (PRA Rulebook, Securitisation (CRR) Part, Article 244(2)). The worked example runs them.

The formal version

For a tranche from A to D of a pool with capital K (KIRB for SEC-IRBA, KA for SEC-SA), with the exponential of M-A03: Exponents and the floors and caps of M-A11: Min, max, floors and caps (CRE41, CRE44):

\begin{aligned} K_{\text{SSFA}} &= \frac{e^{a u} - e^{a l}}{a\,(u - l)}, \qquad a = -\frac{1}{p\,K}, \quad u = D - K, \quad l = \max(A - K,\ 0) \\[4pt] \text{RW} &= \begin{cases} 1250\% & D \le K \\[2pt] 12.5\,K_{\text{SSFA}} & A \ge K \\[2pt] \dfrac{K - A}{D - A}\,1250\% + \dfrac{D - K}{D - A}\,12.5\,K_{\text{SSFA}} & A < K < D \end{cases} \\[4pt] \text{RW} &\ge 15\% \quad (10\% \text{ for an STS senior tranche}) \\ K_A &= (1 - W)\,K_{\text{SA}} + 0.5\,W, \qquad p_{\text{SA}} = 1,\ 0.5 \text{ (STC)},\ 1.5 \text{ (re-securitisation)} \\ p_{\text{IRBA}} &= \max\big(0.3,\ a_0 + b_0/N + c_0\,K_{\text{IRB}} + d_0\,\text{LGD} + e_0\,M_T\big), \quad \text{STC: } \max\big(0.3,\ 0.5\,(\cdots)\big) \end{aligned}

$a_0$ to $e_0$ are the supervisory parameters of CRE44.17 Table 1 (called A to E there) by pool type and seniority; $M_T$ is the tranche maturity, 1 to 5 years (CRE40.22); W is the share of the pool in arrears. The formulas are images in the Basel text; the course's code reads them from the UK CRR's Articles 259 to 263, which carry the same framework.

Try it

Slide Class B's attachment point down towards KIRB and watch the risk weight climb, then cross it. Switch to STS. Then try the mortgage pool: why does a senior tranche sit on the floor almost at once?

Try itPlace a tranche

Pool

STS

Tranche

Attachment point A8.0%

Thickness D − A7.0%

Rating, for SEC-ERBA

SEC-IRBASEC-SAAttachment point across, risk weight up (log scale); dashed: the 15% floor

SEC-IRBA risk weight98.9%

SEC-SA risk weight720.2%

SEC-ERBA (A)146.2%

Tranche A to D8.0% to 15.0%

SEC-IRBA p0.487

KIRB / KA4.78% / 7.23%

The tranche sits wholly above KIRB: its weight is 12.5 × KSSFA, falling fast as it moves up the structure.

Pools and tranches are illustrative slices of the bank's book (m4-2 securitisation.ts): N = 120 for the corporate pool, maturity MT 4.09 years. SEC-ERBA uses the long-term table for the rating, interpolated on MT; the STS table has no rows below BBB−.

Worked example

Selling the mezzanine: the bank's capital relief

£ millions; SEC-IRBA, not STS; the UK significant risk transfer tests.

Before and after the deal

Step 1 of 6

1
Before
$12.5 \times K_{\text{IRB}} \times \text{pool} = 12.5 \times 4.78\% \times 1{,}170.9 = \underbrace{650.4}_{\text{UL RWA}} + \underbrace{48.7}_{12.5 \times \text{EL}} = 699.1$

Mortgage tranches: Class A 6%–100%, Class B 3%–6%, Class C 1%–3%, Class Z 0%–1%. KIRB includes expected loss (CRE44.2), so the “before” adds 12.5 × EL to the UL RWA to compare like with like. Risk retention rules are left out.

Regulatory lens

Basel: CRE40 to CRE44. Status as at 3 November 2026 as at 3 Nov 2026.

In the UK

The significant risk transfer tests are in the PRA Rulebook's Securitisation (CRR) Part, Article 244(2). From 1 January 2027 firms may choose a risk-sensitive, formula-based p for SEC-SA, set out in CP13/24, in place of the fixed 1 (0.5 for STS), and use it in the output floor too (PS19/25, near-final, 28 October 2025, paras 2.11–2.13; made final without substantive change in PS3/26, 20 January 2026). The PRA consulted on further reforms in CP2/26 (17 February 2026), including a new L-shaped risk retention option; it proposed to implement them in the second quarter of 2027.

In the EU

The STS label and its criteria are in the Securitisation Regulation, Regulation (EU) 2017/2402. For the output floor, CRR Article 465(13) lets a bank that uses SEC-IRBA compute the SEC-SA figure in S-TREA with p = 0.25 for STS and 0.5 for other positions until 31 December 2032. On 17 June 2025 the Commission proposed to amend both texts (COM(2025) 825 and 826), making the risk weight floors sensitive to the pool's risk and lowering p for senior positions. The Council and the Parliament reached a provisional agreement on 21 October 2026; it still has to be formally adopted.

Spark Atoms

Spark AtomMore capital after slicing

The bank's corporate pool needs £699.1m of RWA as loans, and its four tranches £1,184.8m between them, 69% more. The p parameter puts that surcharge in on purpose: risk held through tranches is harder to model and was badly underestimated before 2008.

Spark AtomWhy 1250%

12.5 × 100% = 1250%. A tranche at 1250% needs capital equal to its full size at the 8% minimum, the same as deducting it from capital. That is the treatment for positions inside the pool's own capital, and for any position the bank cannot analyse under one of the approaches.

Key takeaways

Approach: SEC-IRBA if the bank can compute KIRB, otherwise SEC-ERBA for rated tranches, otherwise SEC-SA; failing all, 1250%. Re-securitisations use SEC-SA with p = 1.5.
Capital per tranche depends on K (the pool's own capital), A and D, and p. Below K: 1250%. Above it the supervisory formula falls fast to a 15% floor.
STS halves p and lowers the senior floor to 10%: Class B under SEC-IRBA falls from 98.9% to 26.8%.
The tranches together need more RWA than the pool (£1,185m against £699m); caps stop an originator holding more than before.
Relief needs significant risk transfer. Selling both mezzanine tranches frees £110.8m; selling only one frees nothing; the mortgage pool frees nothing because of the floor and the cap.

Reaction

Check what stuck

Question 1 · objective 2

Under SEC-SA, with p = 1 and KA = 5%, what is the parameter a = −1/(p · KA)?

Question 2 · objective 2

A bank holds a £100m first-loss tranche that detaches below KIRB. What minimum capital does it need for it, at 8% of RWA, in £m?

£m

Question 3 · objective 1

A bank on IRB holds a tranche of a CDO whose pool includes RMBS tranches. Which approach must it use?

ASEC-SA, with p = 1.5 and a 100% risk weight floorBSEC-IRBA, because the bank is on IRBCSEC-ERBA, if the tranche is ratedDThe IRB formula on the underlying mortgages

Question 4 · objective 4

In a UK deal the mezzanine tranches carry RWEA of £80m in all, and the originator keeps positions worth £30m of it. What share of the mezzanine RWEA does it hold, in %?

%

Question 5 · objective 3

What does the STS (STC) label change for a senior tranche under SEC-SA?

Ap falls from 1 to 0.5 and the floor from 15% to 10%BThe tranche is exempt from capitalCp rises to 1.5DNothing: STS changes only the disclosure rules

Glossary

KIRB: KIRB: the IRB capital the pool would need if it were not securitised, unexpected and expected loss together, per £1 of pool (CRE44.2).
KSA: KSA: 8% of the pool's average standardised risk weight, per £1 of pool (CRE41.2).
KA: KA: KSA adjusted for loans in arrears: (1 − W) × KSA + 0.5 × W, where W is the share of the pool 90 days or more past due or otherwise delinquent.
Attachment and detachment points: Attachment point A: the pool loss, as a share of the pool, at which a tranche starts to lose money. Detachment point D: the loss at which it is wiped out.
p parameter: p: a supervisory parameter that adds capital for holding pool risk through a tranche. The larger p, the more capital above K. Fixed at 1 under SEC-SA (0.5 for STC, 1.5 for re-securitisation); a formula under SEC-IRBA, at least 0.3.
Supervisory formula (KSSFA): Supervisory formula (KSSFA): the capital per £1 of a tranche above K, the average of an exponential curve between the tranche's two ends.
Hierarchy of approaches: The hierarchy: SEC-IRBA if the bank can compute KIRB; otherwise SEC-ERBA if the tranche is rated and the jurisdiction allows it; otherwise SEC-SA; failing all, 1250% (CRE40.41–40.45).
STS / STC: STS: simple, transparent and standardised, the EU and UK label for securitisations that meet set criteria. Basel calls it STC (simple, transparent and comparable).
Re-securitisation: Re-securitisation: a securitisation in which at least one underlying exposure is itself a securitisation position (CRE40.5).
Significant risk transfer: Significant risk transfer: the condition under which an originator may stop holding capital for the securitised loans and hold it only for the positions it keeps (CRE40.24).
Caps: Caps: an originator never holds more capital for its positions in a deal than it held for the pool before (KIRB or KSA times its largest share in any tranche, CRE40.52–40.54).

Deep Dives & Origins

Deep Dives

Basel Committee on Banking Supervision, CRE40: Securitisation: general provisions: the hierarchy, the caps and the full STC criteria in one chapter. Advanced.

Origins

Basel Committee on Banking Supervision, CRE40 (paras 40.5, 40.24, 40.41–40.54, 40.66–40.72), CRE41 (41.2, 41.6, 41.12, 41.16–41.22) and CRE44 (44.2, 44.17, 44.26–44.29), bis.org.
Prudential Regulation Authority, PRA Rulebook: Securitisation (CRR) Part, Article 244(2), version in force from 1 January 2027.
Prudential Regulation Authority, PS19/25 Restatement of CRR requirements: 2027 implementation, 28 October 2025, paras 2.11–2.13; PS3/26 (final), 20 January 2026; CP2/26, 17 February 2026.
Regulation (EU) No 575/2013 (CRR), Article 465(13), as amended by Regulation (EU) 2024/1623.
European Parliamentary Research Service, Reviving the securitisation framework, 2025, on the Commission proposals COM(2025) 825 and 826 of 17 June 2025.
A&O Shearman, FinReg note on the provisional political agreement on the EU securitisation package, 21 October 2026.

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