Securitisation and derecognition

Securitisation is a major funding tool for banks, but many securitised loans never leave the balance sheet. The outcome turns on who bears the risk after the sale. This guide sets out the order of the tests, works through a mortgage securitisation where the bank keeps the junior notes, and explains continuing involvement.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. 3 minute read.

Short answer

Securitisation lets a bank sell a pool of loans to a special purpose vehicle that funds the purchase by issuing notes to investors. Whether the loans leave the bank's balance sheet depends on two analyses. First, under IFRS 10, the bank decides whether it controls, and must consolidate, the vehicle. Then, under IFRS 9, it applies the derecognition tests: loans are derecognised only if the bank transfers substantially all the risks and rewards, or transfers control when it neither keeps nor transfers substantially all of them. A bank that keeps the junior notes usually keeps the loans on its balance sheet.

At a glance

First
Consolidate the vehicle? (IFRS 10)
Then
IFRS 9 derecognition tests
Derecognise if
Substantially all risks and rewards transferred
Keep if
Substantially all retained
In between
Control decides; continuing involvement
Retained junior notes
Usually no derecognition
Securitisation and derecognitionFirst: Consolidate the vehicle? (IFRS 10); Then: IFRS 9 derecognition tests; Derecognise if: Substantially all risks and rewards transferred; Keep if: Substantially all retained; In between: Control decides; continuing involvement; Retained junior notes: Usually no derecognition.KEY FACTS AT A GLANCESecuritisation and derecognitionFirstConsolidate the vehicle?(IFRS 10)ThenIFRS 9 derecognitiontestsDerecognise ifSubstantially all risksand rewards transferredKeep ifSubstantially allretainedIn betweenControl decides;continuing involvementRetained junior notesUsually no derecognitionTax BakersSecuritisation and derecognitionFirst: Consolidate the vehicle? (IFRS 10); Then: IFRS 9 derecognition tests; Derecognise if: Substantially all risks and rewards transferred; Keep if: Substantially all retained; In between: Control decides; continuing involvement; Retained junior notes: Usually no derecognition.KEY FACTS AT A GLANCESecuritisation and derecognitionFirstConsolidate the vehicle? (IFRS 10)ThenIFRS 9 derecognition testsDerecognise ifSubstantially all risks and rewardstransferredKeep ifSubstantially all retainedIn betweenControl decides; continuing involvementRetained junior notesUsually no derecognitionTax Bakers
Key facts at a glance, as set out in this guide.

How is a securitisation tested for derecognition?

Do the securitised loans leave the balance sheet?Do the securitised loans leave the balance sheet?Does the bank control thevehicle under IFRS 10?YesConsolidate: loansstay in the groupNoHas it transferred substantiallyall risks and rewards?YesDerecogniseNoHas it retained substantiallyall risks and rewards?YesKeep the loansNoControl and continuing involvement decide
Retained junior notes usually mean the loans stay.

The order matters. A bank first consolidates any vehicle it controls under IFRS 10, so a transfer to a consolidated vehicle is not a transfer out of the group at all. Only then does it ask whether the group has transferred the contractual rights to the loans' cash flows, or entered a qualifying pass-through arrangement, and whether risks and rewards have passed.

An example: a mortgage securitisation

A bank sells 1,000 million of mortgages to a vehicle. The vehicle issues 900 million of senior notes to investors and 100 million of junior notes, which the bank keeps. Historical losses on similar mortgages have been about 2% of the pool.

QuestionAnswer
Who bears expected losses?The bank, through the junior notes, which absorb the first 100 million of losses
Does the bank control the vehicle?Usually yes: it services the loans and holds the exposure to variability
Result in the group accountsMortgages stay on the balance sheet; the 900 million of senior notes are a liability

Because expected losses of about 20 million are far below the 100 million junior tranche, the bank keeps substantially all the variability in the pool's cash flows. Economically the securitisation is secured funding, and the accounts show it that way.

When does securitisation achieve derecognition?

When the bank sells the junior notes as well, or buys credit protection from a third party, so that substantially all the risks and rewards pass to investors, and it does not control the vehicle. Banks pursuing capital relief often structure deals this way, sometimes keeping a small vertical slice of every tranche to meet risk retention rules, which does not by itself prevent derecognition of the rest.

What is continuing involvement?

When a bank neither transfers nor keeps substantially all the risks and rewards, and the buyer cannot sell the assets freely, the bank continues to recognise the loans to the extent of its continuing involvement, for example the amount of a guarantee it gives, with a matching liability. This middle ground is complex and less common.

How do covered bonds differ?

In a covered bond, the bank issues bonds backed by a ring-fenced pool of its own loans, usually mortgages, and keeps both the loans and the risk. The loans always stay on the balance sheet and the bonds are the bank's own liabilities; there is no derecognition question.

How are servicing rights treated?

If loans are derecognised and the bank keeps servicing them for a fee, it recognises a servicing asset or liability when the fee is above or below adequate compensation for the work. When loans stay on the balance sheet, servicing is simply part of managing its own assets.

What do banks disclose?

IFRS 7 requires disclosure of transferred assets not derecognised, with the associated liabilities, and of continuing involvement in derecognised assets, including the maximum exposure to loss. IFRS 12 adds disclosures about interests in unconsolidated structured entities. See derecognition of financial assets, control under IFRS 10 and bank accounting.

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Questions people ask

Does securitisation remove loans from a bank's balance sheet?

Only if the bank does not consolidate the vehicle and has transferred substantially all the risks and rewards, or has transferred control while keeping neither substantially all nor none of them.

Why do retained junior notes prevent derecognition?

Because the junior notes absorb the expected losses, so the bank keeps substantially all the variability in the loans' cash flows.

What comes first, IFRS 10 or IFRS 9?

IFRS 10: the bank first consolidates any vehicle it controls, then applies IFRS 9's derecognition tests at group level.

What is continuing involvement?

Recognising transferred assets to the extent of the bank's ongoing exposure when it neither keeps nor transfers substantially all risks and rewards but keeps control.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 9 Financial Instruments
  2. IFRS Foundation: IFRS 10 Consolidated Financial Statements

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IFRS 9Derecognition of financial assets under IFRS 9IFRS 10Control: power, returns and the link between themBankingBank accounting: the key IFRS issues

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This guide is general information. It is not tax or legal advice for your situation.