Structured finance transactions – such as ABS, MBS, and CLOs – rely on tranching risks into senior, mezzanine, and junior tranches. Each tranche absorbs losses differently in the waterfall structure, and credit ratings are key to making these securities investable.
Under the CRR Standardised Approach (Art. 251–258), external ratings directly determine the capital banks must hold:
✅ AAA/AA-rated tranches → 20% risk weight
✅ A-rated tranches → 50%
✅ BBB-rated tranches → 100%
⚠️ BB-rated tranches → 350%
⚠️ Below BB– or unrated → up to 1250%
⚖️ The Global Financial Crisis showed that even AAA-rated tranches could default when asset quality and incentives were flawed. In the aftermath, the EU introduced stricter securitisation rules, mandatory risk retention, enhanced transparency, and ESMA supervision of rating agencies. Combined with CRR’s capital charges, these measures aim to make rated tranches more reliable and aligned with actual risk.
💡 Why it matters:
Senior tranches benefit from credit enhancement and are attractive to institutional investors.
Mezzanine tranches absorb intermediate losses, often rated A/BBB.
Junior tranches take first losses and are often unrated.
