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Case Studies

Case Study

FORWARD FLOW ARRANGEMENT

FOCUS ON: Case studies,

SUMMARY

The client was reviewing a potential transaction as part of a strategy to take on selected exposures to second charge mortgages and efficiently deploy its capital resources.

As part of its broader review, the client asked Avantage Reply to review their internal materials, identify relevant considerations (primarily from a capital and liquidity perspective) and provide an evaluation of the proposed structure of the transaction.

THE CHALLENGE

Our customer had one main objective, namely understanding the classification of the transactional arrangement i.e. ‘Look-Through Approach’, ‘Traditional Securitisation’ or ‘Synthetic Securitisation’ and the complexities associated in terms of impact on capital and liquidity with respect to Pillar 1 and Pillar 2 RWA calculations.

APPROACH AND SOLUTION

The foundation of our approach was based on reviewing the proposed transaction structure and key covenants in order to identify the key regulatory requirements that may be applicable to assess the relevant capital and liquidity impacts.

Our analysis identified the classification of the transactional arrangements as either ‘Look-Through Approach’ or ‘Synthetic Securitisation’.

If ‘Look-Through Approach’ classification is used, the capital requirement applied would be equivalent to the capital requirement if the underlying positions were directly held (CRR2 268).

Whereas the Securtised - Standardised Approach (SEC-SA) for the 'Synthetic Securitisation‘ requires a much more complex RWA calculation, but with potential for a lower capital requirement.

Our insights and considerations drew upon our experience of working with a wide range of similarly positioned banks, as well as our experience in capital and liquidity analysis. Where required, we also accessed insights from some of our existing clients, to get a sense of the most recent practices in context of some of our observations.

RELATED CONTENTS

Case Study

Counterparty Credit Risk (Pillar 1 and 2)

The client, a major banking group specialised in the provision of online banking and trading services, was in the process of launching new derivative products for its retail clients and required assistance for the counterparty credit risk calculations and regulatory reporting of these products.

Case Study

Standardised Approach for Counterparty Credit Risk

The client, a major banking group specialised in the provision of online banking and trading services, was in the process of launching new derivative products for its retail clients and required assistance with calculating the capital requirements for counterparty credit risk under the new standardised approach. This project was a continuation of similar work which Avantage Reply performed prior for this client, regarding the mark-to-market approach.

Case Study

Development and implementation of the IRB-models

Avantage Reply supported a large bank in Luxembourg with a complete transformation of the internal credit risk model portfolio. In doing so, our team was involved in several steps of the model lifecycle: model development, model backtesting, model validation by the second line of defense, model review by the ECB and implementation of the model in the bank’s IT system.

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