FRB and OCC Issue Guidance on When to Use Simplified Supervisory Formula Approach for Bank Securitization Exposures | Practical Law

FRB and OCC Issue Guidance on When to Use Simplified Supervisory Formula Approach for Bank Securitization Exposures | Practical Law

The Federal Reserve Board and the OCC released guidance designed to help banking organizations determine when the simplified supervisory formula approach (SSFA), rather than the supervisory formula approach, may be used to calculate the value of securitization exposures for the purpose of US bank risk-capital requirements.

FRB and OCC Issue Guidance on When to Use Simplified Supervisory Formula Approach for Bank Securitization Exposures

by Practical Law Finance
Published on 27 May 2015 • USA (National/Federal)
The Federal Reserve Board and the OCC released guidance designed to help banking organizations determine when the simplified supervisory formula approach (SSFA), rather than the supervisory formula approach, may be used to calculate the value of securitization exposures for the purpose of US bank risk-capital requirements.
On May 18, 2015, the Federal Reserve Board (FRB) together with the OCC released guidance designed to help banking organizations determine when the simplified supervisory formula approach (SSFA) (12 CFR 217.142(a)(4)), rather than the supervisory formula approach (SFA) (12 CFR 217.143(a)), may be used to calculate the value (or risk-weighted asset amount) of securitization exposures for the purpose of US bank risk-capital requirements under the advanced approaches risk-based capital rule (12 CFR 217, Subpart E).
Under Subpart E of 12 CFR 217, for a securitization exposure that does not automatically require deduction from capital or a 1,250 percent risk weight, the risk-weighted asset amount must be computed using the SFA when the banking organization can reasonably calculate the SFA parameters on an ongoing basis. Alternatively, the SSFA must be applied or the exposure generally receives a 1,250 percent risk weight. (For more information, see Practice Note, Final Market Risk Capital Rule: Securitizations: SFA/SSFA Methods.)
Recognizing that the acquisition and analysis of data needed to implement the SFA can sometimes be costly, in 2013, the OCC and FRB released guidance that detailed regulatory flexibility afforded banking organizations in making these calculations while faced with data limitations.
Further to the 2013 guidance, the new guidance clarifies that:
  • For securitizations in which a banking organization meets the rule's definition of an "originating [banking organization]," the SFA generally should be used since it is presumed that the banking institution has a detailed understanding of the risk profile of the underlying exposures in order to properly execute its responsibilities. An originating banking organization is one that either directly or indirectly originates or securitizes the underlying exposures or serve as the sponsor of the asset-backed commercial paper program.
  • If an originating banking organization instead applies the SSFA, supervisors expect the banking organization to provide detailed and robust justification for not applying the SFA.
  • An "investing" banking organization may face significantly greater challenges and cost when attempting to acquire data to implement the SFA, and in cases of data limitations, use of the SSFA may be justified because of immaterial aggregate exposure to securitizations backed by a particular asset class.
  • For securitization exposures that, in the aggregate, are material with respect to a given type of underlying asset class (auto/mortgage/credit card, etc.), an investing banking organization is expected to make a good-faith effort to apply the SFA and must provide justification based on data availability to its primary federal supervisor that it has made reasonable efforts to collect appropriate data for applying the SFA.