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Annual report 2011
60
3.3 Por t fol io Guarantees & Secur i t isat ion
(“G&S”)
3.3.1 Background
EIF extends portfolio guarantees to financial intermediar-
ies involved in SME financing, and by covering part of the
risk faced by those institutions, it helps ease funding and
capital constraints of the intermediaries, and in turn helps
to finance SMEs.
For its G&S business, EIF has developed a set of tools to
analyse portfolio guarantee and structured finance trans-
actions in line with common market practices. Before EIF
legally enters into a guarantee transaction, the G&S divi-
sion, within the Transaction and Relationship Management
(TRM) department, proposes an internal rating to each
new own risk guarantee tranche in accordance with the
EIF’s internal rules and procedures. When analysing a
new transaction, and in order to estimate the expected
losses and consequently assign an internal rating to a
tranche, the most appropriate rating model is used in com-
pliance with the internal rules. The rating is based on inter-
nal models, which analyse and summarise the tranche’s
credit quality based on an expected loss concept. The EIF
rating is based on quantitative parameters and qualitative
aspects. The following quantitative factors are examples
of variables having an impact on the determination of an
EIF internal rating: weighted average rating of the underly-
ing portfolio and its volatility, base default rate, weighted
average life of transaction, possible loan portfolio perfor-
mance triggers, available credit enhancement, timing of
defaults, expected recovery rates and its volatility, level of
diversification in the underlying pool of assets. The credit
risk estimation also takes into account various qualitative
factors, such as: reliability and completeness of the avail-
able data, size, quality and time horizon of the statistical
samples, discontinuity in the origination criteria and servic-
ing procedures, macro-economic effects.
The majority of EIF own risk guarantee tranches are also
rated by at least one external rating agency. In case there
are differences in the rating levels among external rating
agencies and EIF’s internal rating, EIF applies a retained
rating rule for the calculation of capital. The rule is de-
rived from and aligned to generally accepted regulatory
capital requirements rating treatment, which is as follows:
■
if there is only one assessment by an external rating
agency, that assessment should be used to determine
the risk weight of the tranche (i.e. capital allocation),
■
if there are assessments by two external rating agen-
cies, which map into different risk weights, the higher
risk weight is applied,
■
if there are three or more assessments with different
risk weights, the assessments corresponding to the
two lowest risk weights should be referred to and the
higher of those two risk weights is applied.
To allocate capital for an own risk guarantee tranche, an
EIF internal rating is disregarded from the retained rating
rule only when the tranche is rated at least by one of the
external rating agencies.
Capital allocation and pricing are functions of the ex-
pected loss, i.e. they are risk-adjusted and consequently
vary according to the assigned rating. EIF’s conservative
capital allocation rules have already incorporated these
generally accepted principles for several years. EIF, hav-
ing a status of a Multilateral Development Bank, does not
report to the national supervisor, “Commission de Surveil-
lance du Secteur Financier” (CSSF).
The implementation of the Ratings Based Approach (RBA)
for EIF’s G&S exposures has been carried out with the
technical assistance of the CSSF and in close coopera-
tion with the EIB.
As it is the responsibility of G&S within the TRM department
to propose an EIF rating, which is based on an internal mod-
el, RMM – in the course of the independent opinion process,
at closing and in line with the Model Review Procedure –
conducts a model review for each new rating, as well as
sample checks of updated ratings. The purpose of this pro-
cedure is to reduce the model risk and to establish guidelines
applicable to the official EIF internal rating models.
A transaction is eligible if, at the time EIF enters into the
transaction, the assigned internal rating is in the range of
iAaa- iB1 (iAaa and iB1 are mapped to Moody’s Aaa
and B1, respectively). The individual performance of
tranches guaranteed by EIF is reviewed regularly on a
quarterly basis.