Foundations of the Proposed Modified Supervisory Formula Approach

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.