Should a retained 1250 per cent position be deducted or risk-weighted?
The two treatments are presented as equivalent, and they stopped being equivalent the moment the bank set a capital target above the regulatory minimum.
Deduct it. A 1250 per cent risk weight and a deduction from common equity tier 1 are equivalent only at the 8 per cent regulatory minimum; at an internal target of 13.50 per cent, risk-weighting the retained sliver costs 168.75 per cent of its face value against 100 per cent for deduction. On the €14.0 million vertical slice retained in Northwall 2026-1 the election is worth €9.5 million of capital, taking the capital released from €214.4 million to €223.9 million.
Where the sliver comes from
Northwall 2026-1 is a synthetic securitisation on a €4,000.0 million portfolio of corporate and mid-market term loans. The junior tranche runs from 0.00 per cent to 7.00 per cent of the pool, or €280.0 million. The bank sold €266.0 million of it — 95.00 per cent — to a credit fund, and kept the balance.
The balance is €14.0 million, a vertical slice of 5.00 per cent held to satisfy the risk retention rule. It looks like a rounding item on a transaction of this size. It is not, because of where it sits: at the bottom of the structure, below KIRB of 6.51 per cent, in the part of the loss distribution the framework punishes hardest. Under SEC-IRBA the junior tranche weighs 1244.11 per cent. It is not exactly 1250 per cent only because its top sliver sits marginally above KIRB and escapes the punitive treatment.
A position attracting that weight may instead be deducted from common equity tier 1, euro for euro. Most descriptions of the framework present the two treatments as equivalent and move on. That is where the money is lost.
The arithmetic that separates the two treatments
They are equivalent at one capital ratio and one only. At the 8 per cent regulatory minimum, a 1250 per cent risk weight consumes exactly the face value of the position: 1250 per cent × 8 per cent is 100 per cent of the exposure. That is the identity everyone remembers.
No bank runs at 8 per cent. Northwall Bank manages to an internal common equity tier 1 target of 13.50 per cent, and the same multiplication at the target gives 1250 per cent × 13.50 per cent, or 168.75 per cent of the exposure. Deduction still costs 100 per cent, because a deducted position costs its face value and nothing more.
Treatment of a punitively weighted position
Capital cost, per euro of face
Risk-weighted, at the regulatory minimum
100 per cent
Risk-weighted, at the bank’s internal target
168.75 per cent
Deducted from common equity tier 1
100 per cent
The two treatments coincide only at the minimum. The gap widens with the target.
Deduction sounds like the harsher election — capital taken off the numerator, euro for euro, with no netting and no density to hide behind. It is the cheaper one for any bank managing above 8 per cent, which is every bank, and it gets cheaper the higher the target goes.
What it does to the capital released
Before the transaction the portfolio carried €3,077.1 million of risk-weighted assets at a density of 76.93 per cent, immobilising €415.4 million of equity at the internal target. After it, two positions remain: the retained senior tranche at 35.34 per cent, and the retained junior sliver. Run the closing balance sheet under each election.
Treatment of the retained sliver
Capital held after the trade
Capital released
Deducted from common equity tier 1
€191.5 million
€223.9 million
Risk-weighted under SEC-IRBA
€201.0 million
€214.4 million
Difference
€9.5 million
€9.5 million
One box on a regulatory return, €9.5 million of capital.
€9.5 million turns on a field that most people would describe as presentational. There is no negotiation behind it, no structuring, no fee and no counterparty. Set against an annual protection cost of €27.9 million on the same transaction, it is the cheapest capital in the structure — and unlike the margin, nobody has to be persuaded to give it up.
The retention itself is not free
Even on the better election, the retained €14.0 million costs €14.0 million of capital, because a deducted position costs par. The bank has bought protection on 95.00 per cent of the junior tranche and gets relief on exactly that. That is the price of the risk retention rule, and it is charged before anyone has negotiated a coupon.
The rule permits several compliant forms and they are not equally expensive. A vertical slice puts 5 per cent of the retention into the punitive junior position. Retaining a randomly selected 5 per cent of the underlying exposures under Article 6(3)(c) instead leaves those loans outside the securitisation entirely, weighted as ordinary corporate exposures at a density near 76.93 per cent rather than deducted at par, which on this transaction saves roughly €2.1 million of capital. The comparison is not like for like — random selection is 5 per cent of the pool, not 5 per cent of the tranche — and it is operationally awkward, has to be demonstrated to the supervisor, and complicates servicing a book where some loans are in the reference pool and some are not. It is a real trade-off between a capital cost and an operational one.
What to do with it
Find the election. Ask the reporting team which treatment the retained position takes on the regulatory return, and ask for the number under both. If nobody can answer in an afternoon, the box has been filled in by default.
Run the multiplication at the internal target, not at 8 per cent. The equivalence everyone quotes is a statement about the minimum, and no bank operates there.
Decide the form of retention before the structure is fixed, not after. The vertical slice is the default because it is simple, not because it is cheap.
Put the €9.5 million in the committee paper as capital released, not as a footnote. It moves the capital released from €214.4 million to €223.9 million, and every ratio computed downstream moves with it.
The workbooks behind this article
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