7.8.15.2 Prepayments – Standardized Approach

As part of the Standardized Approach Solution, prepayments and early redemptions may have prescribed scaling factors applied in a Standardized Approach shock scenario, as defined by the BCSB Standardized Approach rules for prepayments and early redemptions.Further details may be found in the BCSB publication Interest Rate Risk in the Banking Book” (April 2016) page 28, Table 3 for CPR, and page 29, Table 4 for Early RedemptionsInterest Rate Risk in the Banking Book” (April 2016) page 28, Table 3 for CPR, and page 29, Table 4 for Early Redemptions.

Standardized Approach shocks scaling factors for CPR & ER are stored in the table FSI_IRC_STDAPRCH_CPRER.

If a Prepayment Rule is assigned to a product-currency combination and if a Standardized Approach shock is applied, the CF Engine will automatically apply the corresponding CPR/ER scaling factor to its respective shock and time bucket, and working backward will calculate the required prepayments/early redemptions associated with that shock.

For example, suppose an asset product-currency subject to prepayment derives a CPR of 30% in its base scenario in each distinct time bucket. Per Standardized Approach specifications, the CPR would receive a scaling factor of .8 in the SA Parallel Up scenario, 1.2 in the SA Parallel Down scenario, and so forth.This means that this product-currency asset will receive this new CPR and the notional prepayments will reflect this adjustment. This principle is also applicable to liabilities subject to early redemption.

In the Standardized Approach Framework, Prepayment Models that are rate-sensitive are only applicable in the base scenario. The base scenario prepayment CPR Value is assumed to apply to all SA Shock Scenarios multiplied by its respective scaling factor in each bucket.

Standardized Approach Scaling factors for prepayments and early redemptions only apply to Prepayment rules applied to the Product-Currency node level. Other Cash Flow Behavioral Modeling, such as Payment Patterns, Behavior Patterns, and so on, are not affected by Standardized Approach Shock Scalars.