How Asset-Backed-Securities Can Optimise Balance Sheets

Regulatory Capital Relief and RWA Reduction

With tightening capital regulations, reducing RWAs has become critical for banks. Through securitisations, institutions can transfer the credit risk of specific portfolio segments or tranches to investors. Typically the highest-risk tranches within a portfolio are assigned to third parties or protected through credit protection mechanisms. This transfer effectively shields the bank from losses on these riskier tranches.

Institutions often retain only the senior tranche whose relatively low probability of default is being reflected in lower RWAs. Banks achieve regulatory capital relief that can be redirected into new lending or bolster liquidity reserves.

However, institutions must remain flexible in managing unexpected losses on retained tranches. Should the credit performance of the underlying pool deteriorate beyond anticipated levels resulting in losses that impact the senior tranche, the RWAs will be adjusted in line with the updated risk exposure. This flexibility allows institutions to dynamically adjust capital requirements as risks evolve.

Growing Volumes of SRT Transactions

A significant risk transfer is a robust capital management tool, in particular for assets with high capital burdens. SRTs allow banks to transfer substantial portions of credit risk from specific asset pools — often targeting the riskier mezzanine or first-loss tranches — to external investors. This way they improve their capital ratios without equity dilution.

As regulatory pressures increase, the demand for SRT (in particular synthetic SRTs) continues to rise, for both public and private transactions. The mechanics of synthetic SRTs typically involve credit protection agreements or guarantees that provide coverage for potential losses in the transferred tranches. SRT securitisations are also appealing to investors who want direct exposure to specific asset pools without exposure to the originating bank’s overall risk.

Transparency via STS Compliance

The EU’s Simple, Transparent, and Standardised (STS) securitisation framework has made ABS more accessible and capital-efficient, offering reduced capital charges under CRR III. The framework consolidates European securitisation rules, establishing consistency and increasing market trust. To gain the STS designation, a transaction must meet strict criteria, including risk retention, transparency and due diligence which improves investor confidence and ensures compliance with high regulatory standards. Under the Securitisation Regulation STS transactions can benefit from more favorable regulatory treatment.

Originators must retain a 5% net economic interest in the securitised assets, ensuring alignment of interest between banks and investors. In addition, the STS designation requires that underlying asset pools meet homogeneity standards which simplifies due diligence by grouping assets with similar characteristics. By fulfilling such stringent criteria, STS-compliant securitisations become a capital-efficient method for structuring cost-effective transactions, particularly for lower-rated tranches.

The STS framework also offers clear eligibility criteria, such as requiring a “true sale” or legally equivalent transfer of assets to a special purpose vehicle. To avoid complex risk structures, active portfolio management and unforeseen changes of origination and collection policies are limited. STS-compliant ABS offer not only lower capital charges but also a streamlined process that aligns with regulatory transparency expectations.

Sophisticated Software Solutions

Using software solutions, institutions can increase efficiency in ABS transactions throughout the securitisation lifecycle – responding to increasing operational costs that come with regulatory transparency expectations. Software can help institutions to select the optimal pool for compliance with eligibility criteria and concentration limits. Automated waterfall calculations, note amortisation and default allocation may replace cash and calculation management functions that would usually be outsourced to a third party.

Software solutions provide robust reporting for EU Securitisation Regulation, ESMA, ECB and COREP requirements as well as scenario-based simulations that forecast capital and RWA relief across varying conditions over time. Such capabilities support strategic decision-making for capital management.