Two changes to SEC-IRBA, one input halved and one floor lowered. On a typical structure only the first binds, and it is worth a third more capital relief.
STS status changes two things in the SEC-IRBA formula for the senior tranche an originator retains: the p-factor is halved, with a floor of 0.30, and the risk-weight floor falls from 15 to 10 per cent. On an illustrative 4,000 million corporate portfolio with a 7.00 per cent first-loss tranche, the senior's weight falls from 35.34 to 20.35 per cent and the capital released rises from 223.95 million to 299.19 million: 75.24 million more, a third more relief, from the same tranche sold at the same price.
Worked in full in Significant Risk Transfer by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The label does not touch the tranche the investor buys. It changes the weight on the senior the bank keeps, and for a bank that is where almost all the capital in a synthetic trade sits.
Northwall 2026-1 is the fictional transaction of the case: a bank buys protection on the 0 to 7.00 per cent tranche of a granular corporate portfolio, keeps a 5 per cent vertical slice of it, which it deducts from CET1, and retains the senior from 7.00 to 100 per cent. The calculation follows the wholesale senior coefficients of SEC-IRBA as currently written in the CRR (Articles 259 and 260). The Commission's 2025 proposal to amend the securitisation framework would recalibrate p and the floors, so check the text in force.
| Input | Value |
|---|---|
| Reference portfolio | 4,000 |
| RWA before the trade, density | 3,077.08, 76.93% |
| KIRB | 6.51% |
| Effective number of exposures, N | 166.27 |
| Exposure-weighted LGD | 40.62% |
| Tranche maturity | 5 years |
| Detachment of the sold tranche | 7.00% |
| CET1 target | 13.50% |
p = max[0.30; 3.56 / N − 1.85 × KIRB + 0.55 × LGD + 0.07 × MT]
pSTS = max[0.30; 0.5 × p]
KSSFA = (ea·u − ea·l) / (a × (u − l)), a = −1 / (p × KIRB), u = D − KIRB, l = A − KIRB
Risk weight = max[floor; 12.5 × KSSFA], floor 15% or 10% under STS
In Excel, with named cells: =MAX(Floor,12.5*(EXP(a*u)-EXP(a*l))/(a*(u-l))).
Step 1: p. 3.56 / 166.27 − 1.85 × 6.51% + 0.55 × 40.62% + 0.07 × 5 = 0.4745. Halved, it is 0.2372, below the floor, so the STS p is 0.30.
Step 2: the senior weight. With p of 0.4745, a is −32.40 and the senior, attaching at 7.00 per cent, weighs 35.34 per cent. With p of 0.30, a is −51.24: capital falls away faster above KIRB, and the weight is 20.35 per cent. Neither is near its floor, so the lower STS floor does nothing here. All of the gain comes from p.
Step 3: capital, before and after. Before the trade the bank holds 3,077.08 × 13.50% = 415.41. After, it holds the senior's capital plus the deducted slice of 14.00.
| Line | Without STS | With STS |
|---|---|---|
| Senior notional | 3,720.00 | 3,720.00 |
| Senior risk weight | 35.34% | 20.35% |
| Senior RWA | 1,314.49 | 757.16 |
| Senior capital | 177.46 | 102.22 |
| Retained slice, deducted | 14.00 | 14.00 |
| Capital after the trade | 191.46 | 116.22 |
| Capital released | 223.95 | 299.19 |
STS releases 75.24 million more, 33.6 per cent more than the plain structure, and takes the share of RWA released from 57.3 to 75.4 per cent. Each point of senior risk weight is worth 5.02 million of capital on this structure, so the 15-point drop is the whole story. At an illustrative 11.5 per cent cost of equity, the extra capital is worth 8.65 million a year, against a protection premium that has not changed.
The trade-off is in the conditions, not the formula. The STS criteria for on-balance-sheet synthetic securitisations were added to the Securitisation Regulation by Regulation (EU) 2021/557, and CRR Article 270, as amended by Regulation (EU) 2021/558, lets the originator apply the STS treatment of Article 260 to the senior it retains. An STS synthetic must meet those criteria, including simple and homogeneous assets, the originator's own underwriting, and eligible protection: in practice, funded protection collateralised in cash or high-quality securities, or an unfunded guarantee from a zero-risk-weighted counterparty such as a sovereign or a multilateral development bank. A bank that cannot document those pays for the plain treatment.
| Detachment | Senior RW | Released | Senior RW, STS | Released, STS | STS gain |
|---|---|---|---|---|---|
| 6.75% | 38.21% | 209.48 | 23.07% | 285.72 | 76.24 |
| 7.00% | 35.34% | 223.95 | 20.35% | 299.19 | 75.24 |
| 7.50% | 30.21% | 249.49 | 15.84% | 321.29 | 71.80 |
| 8.00% | 25.83% | 271.06 | 12.33% | 338.17 | 67.11 |
| 8.50% | 22.09% | 289.26 | 10.00% | 349.00 | 59.74 |
| 9.00% | 18.89% | 304.58 | 10.00% | 348.27 | 43.68 |
| 9.75% | 15.00% | 322.80 | 10.00% | 347.17 | 24.37 |
The gain is largest on thin tranches and shrinks as the tranche thickens. Under STS the senior reaches its 10 per cent floor at a detachment of 8.42 per cent; beyond it the weight cannot fall, while the 5 per cent retained slice keeps growing, so capital released edges down. Without STS the floor binds only at 9.74 per cent. A bank that has STS should therefore not buy protection much beyond 8.42 per cent on this portfolio: the extra thickness costs margin and releases nothing.
Crediting the gain to the lower floor. On most structures sold to investors, the plain senior weighs well above 15 per cent and the STS senior well above 10, so the floor change is worth nothing and the halved p does all the work. Here the floor is worth exactly zero. The second mistake is halving p and forgetting its 0.30 floor: 0.2372 would understate the STS weight. The full formula, coefficient by coefficient, is in how to calculate the SEC-IRBA risk weight.
Halve p, floor it at 0.30, rerun the senior and lower its floor to 10 per cent: on this portfolio the senior drops from 35.34 to 20.35 per cent and 75.24 million more capital is released. Significant Risk Transfer takes the same transaction from the capital calculation to the price a bank and a credit fund agree on, and the free workbook for this case computes the STS column and every detachment from 3 to 14 per cent. How the retained slice is treated is a separate choice, set out in deduct or risk-weight the retained sliver.
Two ways. The p-factor is multiplied by 0.5, with a floor of 0.30, and the senior risk-weight floor falls from 15 to 10 per cent. On an illustrative senior attaching at 7.00 per cent above a 6.51 per cent KIRB, p goes from 0.47 to 0.30 (the halved value, 0.24, is floored) and the risk weight from 35.34 to 20.35 per cent, so only the p change binds.
In the EU, yes, since the 2021 amendments, Regulation (EU) 2021/557 to the Securitisation Regulation and 2021/558 to the CRR (Article 270): an on-balance-sheet synthetic securitisation meeting the STS criteria, with eligible credit protection, lets the originator apply the STS treatment to the senior it retains. On an illustrative 4,000 million portfolio that is worth 75.24 million of capital at a 13.50 per cent target.
Not under STS. On an illustrative portfolio, the STS senior reaches its 10 per cent floor at a detachment of 8.42 per cent; beyond it, a thicker tranche cannot lower the senior weight, but the 5 per cent retained slice keeps growing, so capital released dips from 349.00 million at 8.50 per cent to 347.17 million at 9.75. Without STS the floor binds only at 9.74 per cent.
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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