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Foundations of the Proposed Modified Supervisory Formula Approach

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  • Bank for International Settlements

Abstract

This technical paper describes the modelling framework underlying the Modified Supervisory Formula Approach (MSFA) as proposed in the Basel Committee's recent consultative paper Revisions to the Basel Securitisation Framework. In contrast to the current Basel securitisation framework's Supervisory Formula Approach (SFA), which assumes a one-year maturity for the underlying pool of securitised loans, the MSFA is based on an underlying Expected Shortfall, mark-to-market framework for setting regulatory capital. This mark-to-market underpinning, along with other key assumptions, is intended to render the MSFA more consistent with the Basel's Internal Ratings-Based (IRB) framework for wholesale exposures.

Suggested Citation

  • Bank for International Settlements, 2013. "Foundations of the Proposed Modified Supervisory Formula Approach," BCBS Working Papers 22, Bank for International Settlements.
    • Handle: RePEc:bis:bisbcw:22
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    References listed on IDEAS

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    1. Jeffrey R. Bohn, 2000. "An Empirical Assessment of a Simple Contingent‐Claims Model for the Valuation of Risky Debt," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 1(4), pages 55-77, March.
    2. Stephen Kealhofer, 2003. "Quantifying Credit Risk II: Debt Valuation," Financial Analysts Journal, Taylor & Francis Journals, vol. 59(3), pages 78-92, May.
    3. Gordy, Michael B. & Marrone, James, 2012. "Granularity adjustment for mark-to-market credit risk models," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1896-1910.
    4. Jeffrey R. Bohn, 2000. "A Survey of Contingent‐Claims Approaches to Risky Debt Valuation," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 1(3), pages 53-70, February.
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