The Proposed Revised Ratings-Based Approach

This technical paper describes the assumptions and methodology underlying the Revised Ratings-Based Approach (RRBA) as proposed in the Basel Committee's recent consultative paper Revisions to the Basel Securitisation Framework. The RRBA is calibrated to approximate tranche capital charges generated by the Modified Supervisory Formula Approach (MSFA) under the assumption that an external credit rating is a proxy for the tranche's expected loss rate (EL). Given an assumed risk profile for an underlying homogeneous pool of exposures - characterised by maturity, probability of default, loss given default and asset value correlation - a stylised EL-based credit rating model consistent with the MSFA is used to infer attachment and detachment points for hypothetical tranches having various ratings, seniorities and, for non-senior tranches, thicknesses. With these variables as inputs, the MSFA is used to estimate implied tranche capital charges. The RRBA is then calibrated to approximate the relationship between MSFA capital charges and a tranche's rating, seniority, maturity, and thickness.