Federal Reserve Issues Guidance Regarding the Use of the Simplified Supervisory Formula Approach in Determining Capital Risk Weights for Securitization Exposures for Advanced Approaches Banks
On May 18, 2015, the Board of Governors of the Federal Reserve System (the "FRB") issued guidance indicating when a banking organization that determines its risk-based capital using the advanced approaches may apply the simplified supervisory approach (SSFA) rather than the supervisory formula approach (SFA) when determining the risk weight of a securitization exposure for risk-based capital purposes.
Under the risk-based capital rules, an advanced approaches banking organization must determine the risk weight of a securitization exposure that does not require deduction from capital or a 1,250% risk weight using the SFA where the bank can reasonably calculate the necessary formula inputs (including the required capital of the underlying exposures, or "Kirb") on an ongoing basis. In all other cases, the SSFA must be applied, or the exposure is assigned a 1,250% risk weight.
In 2013, the FRB and the Office of the Comptroller of the Currency (together, the "Agencies") issued guidance regarding the use of the SFA in situations where banks have limited access to necessary inputs. Under the 2013 guidance, banks are required to make "good faith efforts" to obtain the data necessary to calculate the SFA. In the accuracy of estimates, banks may nonetheless apply the SFA provided that the approach taken to estimate the necessary inputs is reasonably conservative.
The May 18th guidance modifies the 2013 guidance and sets forth more general guidelines as to when the SSFA may be used by advanced approaches banks.
For an interactive chart that visually summarizes the May 18th guidance and related issues, please click here.
For an annotated version of the chart, please click here.
We look forward to discussing any issues you might have with the new guidance or the risk-based capital treatment of securitization exposures generally.