A worked example of an SRT measured on both ladders, year by year to 2030, and the tranche thickness that restores the relief.
Yes, and for a bank on which the floor binds it can remove the relief entirely. Once the output floor binds, a bank's risk-weighted assets are set by the standardised calculation, so an SRT is worth what it releases under SEC-SA, not under SEC-IRBA. On an illustrative 2,000 million corporate portfolio, a thin mezzanine sale that frees 475.5 million of RWA on internal models adds 93.4 million of RWA at the fully phased 72.5 per cent floor, because the retained senior weighs 102.67 per cent under SEC-SA with a p factor of 1. A CRR3 transitional that reduces the p factor to the end of 2032 postpones that outcome, it does not remove it.
Worked in full in Significant Risk Transfer by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Under CRR3 (Regulation (EU) 2024/1623), Article 92(3) of the CRR sets a bank's total risk exposure amount as the higher of its internal-model figure and a floor rate times the fully standardised figure. Article 465 phases the rate in: 50 per cent in 2025, 55 per cent in 2026, 60 per cent in 2027, 65 per cent in 2028, 70 per cent in 2029 and 72.5 per cent from 2030. The general mechanics are in how to calculate the output floor.
An SRT moves both ladders at once. On internal models the retained tranches are weighted under SEC-IRBA, anchored on KIRB. On the standardised ladder that feeds the floor, the same tranches are weighted under SEC-SA, anchored on KA, with a p factor of 1 for a non-STS deal. A structure designed against KIRB can look excellent on the first ladder and do nothing, or worse, on the second. While the floor does not bind, only the first ladder counts. Once it binds, only the second does.
| Input | Value |
|---|---|
| Reference portfolio, corporate loans | 2,000 |
| Average IRB risk weight / standardised risk weight | 50% / 100% |
| KSA = 8% × standardised weight; delinquent share W | 8.0% / 0 |
| Retained first loss, 0% to 1.0%, at 1,250% | 20 |
| Mezzanine sold, 1.0% to 8.5%, cash collateralised | 150 |
| Retained senior, 8.5% to 100% | 1,830 |
| Senior under SEC-IRBA, at the non-STS floor | 15% |
| Bank RWA before the trade: internal models / standardised | 40,000 / 60,000 |
| Capital held per unit of RWA | 10.0% |
The bank's internal-model RWA are 66.67 per cent of its standardised RWA, so the floor starts to bind when the rate passes that level, in 2029. The portfolio and tranching are the same as in the site's worked case on synthetic excess spread, so the internal-model figures reconcile.
Step 1: relief on internal models. Before the trade the pool carries 2,000 × 50% = 1,000.0 of RWA. After it, the first loss carries 20 × 12.5 = 250.0 and the senior 1,830 × 15% = 274.5, a total of 524.5. Relief: 475.5 million, or 47.55 million of capital.
Step 2: the senior under SEC-SA. KA = 8.0 per cent, so a = −1 / (1 × 8.0%) = −12.5. Measured from KA, the senior runs from l = 8.5% − 8.0% = 0.5% to u = 100% − 8.0% = 92.0%. Because it attaches only half a point above KA, the exponential has barely started to decay, and KSSFA times 12.5 gives a weight of 102.67 per cent: 1,878.8 of RWA on the senior alone.
KSSFA = (ea·u − ea·l) / (a × (u − l)); RW = max(12.5 × KSSFA, 15%)
Standardised RWA after = 250.0 + 1,878.8 = 2,128.8, against 2,000.0 before: up 128.8
In Excel, KA in B1, attachment in B2: =MAX(12.5*(EXP(-1/B1*(1-B1))-EXP(-1/B1*(B2-B1)))/(-1/B1*((1-B1)-(B2-B1))),15%)
Step 3: the floor, year by year. Total RWA = max(internal models, x × standardised). After the trade the bank has 40,000 − 475.5 = 39,524.5 on internal models and 60,000 + 128.8 standardised.
| Year | Floor rate | TREA before | Floor after | TREA after | Relief |
|---|---|---|---|---|---|
| 2026 | 55.0% | 40,000.0 | 33,070.8 | 39,524.5 | 475.5 |
| 2027 | 60.0% | 40,000.0 | 36,077.3 | 39,524.5 | 475.5 |
| 2028 | 65.0% | 40,000.0 | 39,083.7 | 39,524.5 | 475.5 |
| 2029 | 70.0% | 42,000.0 | 42,090.2 | 42,090.2 | −90.2 |
| 2030 | 72.5% | 43,500.0 | 43,593.4 | 43,593.4 | −93.4 |
Through 2028 the floor is slack and the bank books the full 475.5 million. From 2029 the floor binds before and after the trade, so the relief is the floor rate times the change in standardised RWA: 72.5% × −128.8 = −93.4 in 2030. The 47.55 million of capital the deal was priced to release becomes 9.34 million of extra capital, while the bank still pays the investor's coupon. Article 465 also lets Member States cap the floored amount at 125 per cent of the internal-model figure until the end of 2029; at 42,090.2 against a cap of over 49,000 it would not bite here.
The rows for 2029 and 2030 ignore one transitional provision. As we read Article 465 of the CRR, until the end of 2032 a bank may compute the SEC-SA weights that feed the output floor with a p factor of 0.5 for non-STS positions and 0.25 for STS positions, instead of 1 and 0.5. With p at 0.5, the senior's weight falls from 102.67 per cent to 48.2 per cent, standardised RWA after the trade fall to 1,132.5, and the trade releases 867.5 of standardised RWA. Under the floor that is 607.3 million of relief in 2029 and 628.9 million in 2030. The table's 2030 row is therefore the permanent state from 2033, unless the rules change again. A deal signed in 2026 with a weighted life that runs past 2032, or a replenishing deal, should be tested on both. Check the current text and your supervisor's reading before relying on either figure.
The remedy is the one standardised banks already know: sell deeper into the capital structure so the senior attaches well above KA.
| Detachment | Sold | Senior SEC-SA weight | IRB relief | SA relief | Relief under the floor |
|---|---|---|---|---|---|
| 8.5% | 150 | 102.7% | 475.5 | −128.8 | −93.4 |
| 10.0% | 180 | 86.5% | 480.0 | 192.4 | 139.5 |
| 12.0% | 220 | 68.9% | 486.0 | 537.0 | 389.3 |
| 15.0% | 280 | 49.0% | 495.0 | 916.3 | 664.3 |
| 20.0% | 380 | 27.9% | 510.0 | 1,303.8 | 945.2 |
Two things stand out. Internal-model relief barely moves with thickness, 475.5 to 510.0, because the senior is already at its 15 per cent floor under SEC-IRBA. Relief under the floor moves enormously, from −93.4 to 945.2. At a 15.0 per cent detachment the floor-bound bank releases 664.3 million, more than the 495.0 it would have released with no floor at all, because the pool's 100 per cent standardised weight was the binding number and the trade cuts it. The senior reaches the 15 per cent SEC-SA floor only at an attachment of 25.53 per cent. The price of that relief is a wider sold tranche, and the coupon on 280 rather than 150.
Sizing and pricing the trade on SEC-IRBA alone because the bank has IRB permission. That was a complete analysis before CRR3. It is now complete only for a bank whose floor will stay slack for the life of the deal, and an SRT that runs past the end of the transitional in 2032 meets the full p factor while it is still outstanding. The second mistake is to test the floor on the deal in isolation. The floor is one comparison on the whole bank: a trade can be harmless at a bank whose internal-model RWA are 75 per cent of standardised, and damaging at one whose ratio is 66.67 per cent.
The figures are illustrative. Legislative proposals to revise the securitisation framework may change the floor treatment again, so check the text in force before relying on any figure.
For a floor-bound bank, SRT relief = floor rate × standardised RWA released. Run every structure on both ladders and for every year of its life. A thin mezzanine that frees 475.5 million on internal models can add 93.4 million once the floor binds at its fully phased settings; a 15 per cent detachment turns that into 664.3 million released. The free workbooks for this case compute SEC-IRBA and SEC-SA for any tranche, and the standardised formula is worked in full in how to calculate the SEC-SA risk weight.
When the floor rate exceeds the bank's ratio of internal-model to standardised RWA. A bank with 40,000 million on internal models and 60,000 million standardised has a ratio of 66.67 per cent, so the floor binds from 2029, at 70 per cent. Before then the SRT is measured on internal models only; once the floor binds both before and after the trade, on the standardised ladder alone.
The standardised side of the floor uses the standardised hierarchy for securitisation positions, which for most SRTs means SEC-SA rather than SEC-IRBA. With KA at 8.0 per cent and a p factor of 1, a senior attaching at 8.5 per cent weighs 102.67 per cent, against 15 per cent under SEC-IRBA in the same illustrative deal. With the transitional p factor of 0.5 available to the end of 2032, it weighs 48.2 per cent.
Thick enough for the senior to attach well above KA. In the illustrative case, with a p factor of 1 and a 72.5 per cent floor, a detachment of 10.0 per cent releases 139.5 million, 12.0 per cent releases 389.3 million and 15.0 per cent releases 664.3 million, against a thin 8.5 per cent tranche that adds 93.4 million of RWA.
This article is one calculation from Significant Risk Transfer. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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