Base Case Loss Assumption

In the context of securitisation, a base case loss assumption is the expected percentage of the principal amount of a securitised asset that will default over a specified period of time. This assumption is used to calculate the expected losses for a securitisation transaction and to determine the appropriate credit rating for the securities issued by the transaction.

In Australia, the base case loss assumption for a securitisation transaction is typically set at 1%. This assumption is based on historical default rates for similar assets in Australia.

However, the base case loss assumption can be adjusted to reflect factors such as the credit quality of the underlying assets, the structure of the securitisation transaction, and the economic environment.

For example, if the underlying assets are of high credit quality, the base case loss assumption may be reduced. Conversely, if the underlying assets are of low credit quality, the base case loss assumption may be increased. The structure of the securitisation transaction can also affect the base case loss assumption.

For example, if the transaction is structured to minimise losses, the base case loss assumption may be reduced. Finally, the economic environment can also affect the base case loss assumption. For example, if the economy is in a recession, the base case loss assumption may be increased.

The base case loss assumption is an important factor in determining the credit rating of a securitisation transaction. A higher base case loss assumption will result in a lower credit rating, while a lower base case loss assumption will result in a higher credit rating. The credit rating of a securitisation transaction is important to investors because it indicates the risk of loss associated with the investment.

Here are some additional details about base case loss assumptions in Australian terms:

- The base case loss assumption is typically set by the originator of the securitisation transaction.
- The base case loss assumption is used to calculate the expected losses for a securitisation transaction.
- The base case loss assumption can be adjusted to reflect factors such as the credit quality of the underlying assets, the structure of the securitisation transaction, and the economic environment.
- The base case loss assumption is an important factor in determining the credit rating of a securitisation transaction.