The underlying idea behind a securitisation is to bundle together a pool of assets, repackage them as tradable securities and place them in the capital market. This allows firms to sell their customer exposures, obtain funding from the capital market and invest the proceeds. Banks use securitisation for, amongst other things, refinancing, own funds relief, credit risk mitigation and portfolio management.

In order to ensure that risks arising from securitisations are adequately reflected in institutions' own funds requirements, the Securitisation Framework of the EU (consisting of the Capital Requirements Regulation (CRR) and the Securitisation Regulation, see links) mandates a risk-sensitive and prudentially sound treatment of these transactions.

For this purpose, the concept of securitisation has been defined in such a way that it covers transactions and schemes in which the credit risk associated with an exposure or a pool of exposures is divided into riskier and less risky tranches such that;

1. payments in the transaction or scheme are dependent upon the performance of the exposures,
2. the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme.

Own funds requirements for securitisations are calculated via one of the following approaches:

• the Internal Ratings Based Approach (SEC-IRBA); Articles 258 to 260 CRR;
• the Standardised Approach (SEC-SA); Articles 261 to 262 CRR;
• the External Ratings Based Approach (SEC-ERBA); Articles 263 to 264 CRR;
• the Internal Assessment Approach (IAA); Articles 265 to 266 CRR.

For securitisation exposures for which none of the above approaches is applicable, a risk weight of 1,250% is applied; Article 254(7) of the CRR.

A general distinction is made between three types of securitisation:

• “traditional” securitisation, in which the exposures are sold or transferred to third parties in their entirety;
• “synthetic” securitisation, in which only certain risks are transferred in tranched form through a third-party guarantee; 
• asset-backed commercial paper (ABCP) programmes, in which in several ABCP transactions securities are placed on the capital market as short-dated commercial papers through a securitisation special purpose entity (SSPE).

Moreover, the Securitisation Regulation poses requirements for due diligence on investors and transparency through the extensive provision of information to investors. Requirements on risk retention are intended to align the interests of firms and banks that convert loans into tradable securities through securitisation (originators, sponsors or original lenders) and those of firms and banks that invest in these securities or instruments (investors). To ensure this, it is important that part of the risk from the securitised exposures remains with the originators, sponsors or original lenders.

Securitisations that meet the criteria for simple, transparent and standardised (STS) securitisations qualify for a preferential capital treatment; Chapter 4 of Securitisation Regulation.