EBA欧洲银行-Presentation-Public-Hearing-Significant-Risk-Transfer-in-Securitisation-2017-11-17_14页_1mb

EBA Summary: Significant Risk Transfer in Securitisation

Core Content

The European Banking Authority (EBA) conducted a public hearing on 17 November 2017 to discuss the Significant Risk Transfer (SRT) in securitisation. The discussion focused on aligning supervisory practices with the regulatory requirements outlined in the Capital Requirements Regulation (CRR), particularly Article 243(6) and 244(6), which extend the EBA's mandate to monitor SRT practices.

The EBA aims to enhance and harmonise the regulatory and supervisory treatment of SRT, addressing heterogeneity in current practices, which may lead to regulatory uncertainty and impaired level playing field. This is done through three core areas of work: the process of SRT assessment, structural features of SRT transactions, and quantitative SRT tests.

Main Views and Key Information

1. Process of SRT Assessment

• Objective: To facilitate the SRT process for originators and Credit Authorities (CAs).
• Proposed Standardisation:
  • Ex ante notification of SRT transaction by originator to CA.
  • CA provides explicit feedback (non-objection or objection) within a reasonable timeframe.
  • Additional notifications are required if transaction characteristics change.
  • Use of an amended SRT monitoring template.
• Timing:
  • Notification at the latest 1 month before expected issuance.
  • Final documentation 15 days after closing date.
• Ongoing Monitoring:
  • Quarterly checks on SRT compliance.
  • Consideration of call options and changes in transaction characteristics.

2. Structural Features of SRT Transactions

• Objective: Ensure the sustainability of SRT throughout the transaction's lifetime.

• Proposed Conditions for Structural Features:

  • Traditional and Synthetic Transactions:
    • Pro-rata amortisation: Triggered by cumulative losses, non-matured defaults, or portfolio credit quality.
    • Call options: Should not hinder SRT. In synthetic transactions, exercisable after the WAL (Warehouse Agreement) period.
    • Excess spread: In synthetic transactions, must be fixed and available on a yearly basis. Considered in quantitative tests as 1250% RW/capital deduction.
  • Synthetic Transactions:
    • Credit events must include failure to pay, bankruptcy, and restructuring.
    • Termination clauses: Early termination events (e.g., failure to pay, breach of contract) should not hinder SRT, except for originator's bankruptcy.
    • Cost of credit protection: Contingent premiums should be included in self-assessment and documentation.

• Self-Assessment Exercise:

  • A stress test is proposed to quantify the extent of risk transfer over the lifetime of the transaction.
  • Includes base case and stress scenarios for:
    • PD (Probability of Default) and LGD (Loss Given Default) of underlying exposures.
    • Timing of loss realisation.
    • Portfolio pre-payment behaviour.
    • Availability of excess spread.
  • Based on the transaction's cash flow model.

3. Quantitative SRT Tests

• Objective: Measure the significance of transferred risk and ensure commensurateness of risk transfer.
• Existing Limitations:
  • No clear safeguards for sufficient thickness of relevant tranches.
  • No requirement to assess the sustainability of SRT.
  • Limited focus on commensurateness of transferred risk.
  • Ambiguity around substantial margin and reasoned estimate.
• Proposed Tests:
  • Option 1: Complementing existing tests:
    • Minimum thickness of the first loss tranche:
      • First loss test: First loss tranche + lifetime excess spread ≥ Lifetime EL + 2/3 Regulatory UL.
      • Mezzanine test: First loss tranche + lifetime excess spread ≥ Lifetime EL.
    • New commensurateness test: Ratio of capital reduction achieved by originator ≤ ratio of risk transferred to third parties.
  • Option 2: New test to complement or replace existing tests:
    • Risk retained by originator (post-sec own funds requirements) + 1 year excess spread ≤ sum of EL and 50% of UL on the securitised portfolio.
    • When SEC-ERBA is used, 95% of positions attaching below KA that are not 1250% risk-weighted/deducted must be transferred to third parties.

4. NPL Securitisation

• Objective: Clarify the regulatory treatment of Non-Performing Loan (NPL) securitisation.

• Current Models:

  • Direct bank securitisation: Bank sells NPLs to a securitisation vehicle, which issues notes to third-party investors.
  • Portfolio sale to non-bank investor: Bank sells NPLs to a non-bank, who uses its own capital or leverages via debt finance (e.g., senior bank loan), keeping an equity stake.

• Key Points:

  • In NPL transactions with non-refundable PPD (Provided Protection), the K-IRB (Internal Rating-Based) approach is fully or almost fully covered by losses absorbed by the originator.
  • Only the sale price is securitised in the SPV (Special Purpose Vehicle), while the underlying loans remain obligations of the GBV (Guaranteeing Bank or Vehicle).
  • Tranche 'J' should be considered as attaching at 80%, not 0%, due to the credit enhancement from provisions and non-refundable PPD.
  • The risk weight on securitisation tranches is not 1250%, as the transaction is not assessed in isolation from the portfolio's GBV.

• Questions Raised:

  • Do the recommendations on SRT assessment of complex structural features apply to NPL transactions?
  • Is commensurate risk transfer relevant to NPL securitisation transactions?

Conclusion

The EBA's work on SRT aims to improve the transparency, consistency, and effectiveness of risk transfer in securitisation. By standardising the SRT process, setting clear conditions for structural features, and introducing new or enhanced quantitative tests, the EBA seeks to ensure that capital requirements reflect the actual risk transferred and that supervisory practices are aligned with regulatory expectations. The discussion also highlights the need for clarity in the treatment of NPL securitisation, particularly regarding the role of PPD and portfolio risk assessment.