Securitisation, structured entities, and continuing involvement in transferred loan portfolios

Securitisation forces a two-layer analysis (consolidate the vehicle under IFRS 10, then apply the IFRS 9 derecognition model to what remains), and getting either layer wrong has a large balance-sheet effect: wrongly concluding full derecognition when a retained subordinated tranche keeps substantially all credit risk with the bank hides real leverage and risk retention, while wrongly failing to consolidate a structured entity the bank in substance controls omits its assets, liabilities, and risk entirely from the group accounts.

Applying the IFRS 10 control assessment, does the bank have power over the structured entity, exposure to variable returns, and the ability to affect those returns through its power, requiring consolidation? If not consolidated, has the bank transferred substantially all risks and rewards of the securitised loans, retained substantially all of them, or retained only a limited exposure (servicing fee, retained tranche, credit enhancement) requiring a continuing involvement assessment? Have all forms of continuing exposure, servicing rights, retained subordinated tranches, guarantees, liquidity facilities, been identified, since even a modest retained exposure can determine the risks-and-rewards conclusion?

1. First apply the IFRS 10 control assessment to the structured entity: does the bank have power over it, exposure or rights to variable returns from it, and the ability to use its power to affect those returns? If yes, consolidate, eliminating the intercompany transfer entirely from the group's perspective.
2. If not controlled, apply the IFRS 9 derecognition model to the transferred loans: has the bank transferred substantially all risks and rewards (supporting full derecognition), retained substantially all of them (precluding derecognition, with proceeds treated as a secured borrowing), or transferred neither (requiring a further assessment of whether control over the asset has passed)?
3. Identify all forms of continuing exposure, servicing rights and obligations, retained subordinated or first-loss tranches, credit enhancements, guarantees, liquidity facilities, since even a modest retained exposure can be the deciding factor in the risks-and-rewards analysis.
4. Where continuing involvement (without retaining substantially all risk and rewards) applies, recognize the transferred asset only to the extent of that continuing involvement, matched by a corresponding liability.
5. Reassess consolidation and derecognition conclusions whenever the bank's power over, or exposure to, the structured entity changes, such as through an increase in credit enhancement provided.

Measure any retained interest, servicing asset, or continuing involvement asset and liability at fair value or amortized cost as appropriate to its nature, calibrating estimates of expected prepayments, defaults, and the priority of cash flows across securitisation tranches (the cash flow waterfall) since these directly determine how much value and risk sits in each retained position. Reassess the consolidation conclusion and the risks-and-rewards analysis at least annually and whenever a triggering event occurs, not only at the point of the original transaction.

Disclose: (1) the nature and extent of the bank's interests in unconsolidated structured entities used for securitisation, including maximum exposure to loss; (2) the carrying amount of assets and liabilities recognized in relation to continuing involvement; (3) support (explicit or implicit) provided to the structured entity that was not contractually required, and the reasons; (4) a summary of the risks-and-rewards or control analysis performed for significant securitisations; (5) gains or losses recognized on derecognition, if any, and the basis for the derecognition conclusion.

• Concluding a securitisation achieves full derecognition without properly evaluating retained subordinated tranches or credit enhancement that keep substantially all risks and rewards with the bank
• failing to consolidate a structured entity where the bank in substance controls it despite a minimal direct equity interest, focusing only on legal ownership percentage rather than the full IFRS 10 control assessment
• omitting disclosure of non-contractual (implicit) support provided to a securitisation vehicle, such as voluntarily absorbing losses to protect the bank'
• s reputation
• not reassessing the consolidation or derecognition conclusion when the structure or the bank'
• s exposure changes over time.