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.
Worked in full in Significant Risk Transfer by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
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.
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 |
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.
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 |
€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.
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.
Under SEC-IRBA a tranche detaching at or below KIRB weighs 1250 per cent. The junior tranche of Northwall 2026-1 weighs 1244.11 per cent rather than 1250 per cent, because its top sliver sits marginally above KIRB of 6.51 per cent and escapes the punitive treatment. The difference has almost no economic content.
On Northwall 2026-1 the retained vertical slice is €14.0 million, 5.00 per cent of a €280.0 million junior tranche. Deducted at par it costs €14.0 million of capital. The bank buys protection on 95.00 per cent of the tranche and gets relief on exactly that, before any coupon has been negotiated.
On this transaction, by roughly €2.1 million of capital. Random selection under Article 6(3)(c) leaves the retained loans outside the securitisation, weighted as ordinary corporate exposures at a density near 76.93 per cent instead of deducted at par. It is 5 per cent of the pool, not of the tranche, and is operationally awkward.
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