Four lines of arithmetic, two of which are usually left out: the deduction from capital, and the leverage ratio the trade cannot move.
Recompute the ratio with the pool's risk-weighted assets replaced by the senior's, and the retained slice deducted from CET1. On an illustrative bank with 17,000m of RWA at a 13.50 per cent CET1 ratio, the fictional Northwall 2026-1 trade takes RWA down by 1,762.58m and lifts the ratio to 14.97 per cent, a gain of 1.47 points. If the bank must also hold a 3.50 per cent leverage ratio, only 181.0m of the 223.95m it appears to free can actually be used.
Worked in full in Significant Risk Transfer by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Banks buy synthetic protection to move this ratio, and investors in significant risk transfer are increasingly asked to understand it. It takes four lines to compute, and two of them are routinely left out: the deduction, which reduces the numerator, and the leverage ratio, which the trade does not touch at all.
| Input | Value |
|---|---|
| Bank RWA before the trade | 17,000 |
| CET1 ratio before (also the bank's target) | 13.50% |
| Leverage exposure / leverage requirement (Tier 1 = CET1 here) | 60,000 / 3.50% |
| Reference pool RWA before (IRB) | 3,077.08 |
| Retained senior / SEC-IRBA risk weight | 3,720 at 35.34% |
| Junior retained vertically, deducted from CET1 | 14 |
| Protection sold / margin over the reference rate / tax | 266 / 10.50% / 25% |
RWA after = bank RWA − pool RWA + senior notional × senior risk weight
= 17,000 − 3,077.08 + 3,720 × 35.34% = 17,000 − 3,077.08 + 1,314.50 = 15,237.42
CET1 after = 17,000 × 13.50% − 14 deducted = 2,295 − 14 = 2,281
CET1 ratio after = 2,281 ÷ 15,237.42 = 14.97%, up 1.47 points
In Excel: =(RWA*Ratio-Deducted)/(RWA-PoolRWA+Senior*SeniorRW)
The pool's 3,077.08m of RWA becomes 1,314.50m on the senior: 57.3 per cent of the pool's RWA disappears. The junior tranche is not risk-weighted at all. The 95 per cent sold to the fund is covered by the fund's cash collateral, and the 5 per cent the bank keeps for retention is deducted from capital instead, which is why it shows up in the numerator rather than the denominator.
A bank that runs at its 13.50 per cent target does not hold the ratio at 14.97 per cent; it uses the excess. Capital needed after the trade is 15,237.42 × 13.50% = 2,057.05m against 2,281m held, so the trade frees 223.95m. That is the same figure the pool-level view gives: capital on the pool before, 3,077.08 × 13.50%, less capital on the senior after plus the deducted slice. The two methods must agree, and checking that they do is the first control on any model of the trade.
A synthetic securitisation leaves the loans on the balance sheet, so the leverage exposure stays at 60,000m. The deduction even lowers Tier 1: the leverage ratio moves from 3.82 to 3.80 per cent. At a 3.50 per cent requirement the bank needs 2,100m of Tier 1 whatever its RWA.
Usable release = CET1 after − max(RWA after × target, leverage exposure × leverage requirement)
= 2,281 − max(2,057.05; 2,100) = 181.0m, so 42.9m of the 223.95m stays trapped
| Leverage requirement | Tier 1 needed | Binding constraint | Usable release |
|---|---|---|---|
| 3.00% | 1,800 | risk-based | 223.9 |
| 3.25% | 1,950 | risk-based | 223.9 |
| 3.50% | 2,100 | leverage | 181.0 |
| 3.75% | 2,250 | leverage | 31.0 |
The leverage requirement starts to bite at 3.43 per cent on this balance sheet, because the bank's RWA density is only 28.33 per cent. A low-density bank with a thin leverage buffer can show a 1.47-point CET1 gain and still be unable to distribute or redeploy most of it.
| Bank RWA | Ratio after, non-STS | Gain, points | Ratio after, STS | Gain, points |
|---|---|---|---|---|
| 8,000 | 17.09% | 3.59 | 18.77% | 5.27 |
| 17,000 | 14.97% | 1.47 | 15.54% | 2.04 |
| 40,000 | 14.09% | 0.59 | 14.29% | 0.79 |
The capital released is the same 223.95m at every size, 299.19m with STS, where the senior weighs 20.35 per cent. Ratio points are not: the same trade is worth 3.59 points to a bank of 8,000m of RWA and 0.59 to one of 40,000m. Quote the release in euros when comparing deals across banks, and the ratio only for the bank in question.
The capital released and the most the bank can pay for it are worked in the most a bank can pay for SRT protection; the ratio itself, from a balance sheet, in how to calculate a bank's CET1 ratio.
CET1 after = (CET1 − deducted) ÷ (RWA − pool RWA + senior RWA): 14.97 per cent here, 1.47 points up. Convert the points to euros at the bank's target, 223.95m, and then test the leverage ratio, which caps the usable part at 181.0m. The bank's economics, including a leverage-bound case, are live formulas in the free workbooks for this case.
No. The loans stay on the balance sheet, so the leverage exposure does not change, and a retained slice deducted from capital lowers Tier 1. On an illustrative bank with 60,000 million of exposure, the Northwall trade moves the leverage ratio from 3.82 to 3.80 per cent, and a 3.50 per cent requirement traps 42.9 million of the capital released.
Multiply RWA after the trade by the bank's CET1 target and subtract it from CET1 after the deduction. On 15,237.42 million of RWA at 13.50 per cent the bank needs 2,057.05 million against 2,281 million held, so the trade releases 223.95 million, the same as the pool-level calculation.
Because the capital released is fixed by the pool, not by the bank. The same Northwall trade releases 223.95 million whatever the bank's size, which is 3.59 points of CET1 ratio on 8,000 million of RWA and 0.59 points on 40,000 million. Compare deals in euros released, not in ratio points.
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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