EBA欧洲银行-Call-for-Advice-on-European-Secured-Notes-2826-June-Public-consultation-29_22页_1mb

EBA Recommendations on European Secured Notes (ESNs)

1. Mandate

The European Banking Authority (EBA) received a Call for Advice (CfA) from the European Commission on European Secured Notes (ESNs), to be delivered by 30 June 2018.

• ESNs are defined as dual recourse financial instruments on an issuer's balance sheet, applying the basic structural characteristics of covered bonds to SME bank loans and infrastructure bank loans.
• The EBA was requested to assess the appropriateness of its 2016 covered bond best practices for ESNs, the risk treatment for ESNs, the impact on asset encumbrance, and any relevant technical aspects.

2. Business Case

Qualitative Assessment

Pros:

• For SME loans:
  • Overcome lack of standardisation in SME investments
  • Complementary to SME ABS
  • Attract new investors with lower risk appetite due to dual recourse
  • Alleviate the pro-cyclical pattern of SME lending
• For infrastructure projects:
  • New funding opportunity as infrastructure loans are unlikely to qualify as STS securitisations
  • Wider investor base due to standardisation
  • Useful for asset and liability management

Cons:

• Under current good funding conditions, a new tool is not needed
• Priority should be given to improving the STS framework for SME loans, enhancing SME loan data, and addressing the shortage of risk capital
• For infrastructure loans:
  • Securitisation and capital debt relief instruments may work better
  • The market is already sufficiently funded via private debt and long-term lenders
  • Risk of market confusion if ESNs are not clearly separated from traditional covered bonds

Potential Size of the ESN Market

• Based on EBA 2017 transparency exercise, the aggregate pool of SME and infrastructure exposures potentially available for ESNs is estimated at c.€4 trillion.
• Assuming a coverage of SME and infrastructure loans comparable to mortgage loans, the ESN market could range between €400 billion and €1.2 trillion (depending on over-collateralisation assumptions).
• If ESNs are not fully subject to the same regulatory framework as covered bonds, the market size would be overestimated.

3. Impact on Asset Encumbrance

Qualitative and Quantitative Assessments

• The introduction of ESNs would lead to an increase in asset encumbrance in the EU due to the dual recourse and over-collateralisation requirements.
• The impact on the asset encumbrance ratio is estimated to be between +1.2 pp and +4.1 pp as of December 2016, depending on the collateralisation level.
• The EBA recommends that asset encumbrance should be considered in the broader context of a bank's funding, liquidity, and business model, rather than solely at the product level.
• If ESNs become highly successful, aggregate or national-level encumbrance limits may need to be considered.

4. SME ESNs

Structure and Cover Assets

• SME ESNs could be structured as dual recourse instruments, but they would not be secured by real estate.
• The EBA recommends adjusting the 2016 covered bond best practices to better fit SME exposures, including:
  • Composition of cover pools (Best practices 3A and B)
  • Coverage principles and over-collateralisation (Best practice 5)
  • Liquidity buffer (Best practice 6)
  • Scope of disclosure (Best practice 8A)

Eligibility and Quality Criteria

• Eligibility: Only SME loans and leasing exposures to SMEs (as defined in the CRR) should be included in the cover pool. Other exposures like overdraft and factoring should be excluded due to their short maturity.
• Quality standards: SME loans must be non-defaulted, and credit institutions must have sound credit underwriting standards.
• Granularity: The cover pool should contain at least 500 exposures.
• Concentration: No single obligor should exceed 2% of the cover pool value.
• Minimum OC requirement: A minimum over-collateralisation (OC) of 30% should be maintained at all times.
• Defaulted exposures: These should not be included in the OC calculation, and provisions should be deducted from the nominal amount.

Regulatory Treatment

• Credit risk treatment under CRR: SME ESNs should be treated based on the actual risk profile of the underlying exposures, and a differentiated risk weight could be considered compared to unsecured exposures.
• LCR treatment: Due to the lack of liquidity data, preferential liquidity treatment should be deferred until a proper assessment is made.
• UCITS treatment: If SME ESNs meet UCITS criteria, a preferential investment threshold could be considered.
• EMIR treatment: An exemption from collateral posting could be considered if ESNs mitigate counterparty risks and align with covered bond best practices.
• BRRD treatment: SME ESNs should be treated as secured liabilities, potentially exempt from bail-in.

5. Infrastructure ESNs

Structure and Cover Assets

• A dual recourse structure is not appropriate for infrastructure exposures due to their higher regulatory capital consumption and complex nature.
• Infrastructure loans are more heterogeneous and have higher average exposure than covered bonds, making it difficult to design an ESN with a similar risk profile.
• The EBA suggests restricting cover assets to operational phase project finance loans, and applying eligibility criteria from the CRR 2 proposal (Article 501a, points (a) to (c)).

Regulatory Treatment

• As the EBA advises against dual recourse for infrastructure ESNs, no specific regulatory treatment has been assessed.
• A new class of off-balance-sheet funding instruments for high-quality infrastructure loans could be considered, such as an EU infrastructure bond.
• This bond could be standardised, secured by segregated infrastructure loans, and offer capital relief through risk transfer.
• It could be subject to special public supervision.
• The EBA recommends that the European Commission consider issuing a call for advice to explore the feasibility of a standardised EU infrastructure bond.

Summary of Key Recommendations

• ESNs are a new secured funding instrument for SME and infrastructure loans, applying dual recourse and over-collateralisation principles.
• The EBA recommends adjusting the 2016 covered bond best practices to account for the specific characteristics of SME and infrastructure exposures.
• Asset encumbrance is expected to increase, but the impact is assessed as moderate.
• SME ESNs should have strict eligibility criteria, high granularity, and minimum OC of 30%.
• Infrastructure ESNs are not suitable for dual recourse, and the EBA suggests focusing on operational phase project finance loans.
• A standardised EU infrastructure bond could be a better option for infrastructure financing, offering capital relief and special supervision.
• The EBA calls for a further assessment by the European Commission on the feasibility of SME and infrastructure ESNs.