EBA欧洲银行-EBA-DP-2014-02-Discussion-Paper-on-simple-standard-and-transparent-securitisations_79页_1mb

EBA Discussion Paper on Simple, Standard and Transparent Securitisations Summary

Core Content

The EBA Discussion Paper on simple, standard and transparent securitisations is a response to the European Commission's call for advice in December 2013, aiming to promote a safe and stable securitisation market. It analyses the state of the EU securitisation market, the impact of regulatory reforms since 2009, and the potential impediments to market development in the post-crisis era. The paper proposes a framework for identifying qualifying securitisations and outlines recommendations for capital treatment to ensure consistency and fairness.

Main Views

• Securitisation as a Funding Tool: Securitisation transforms on-balance sheet exposures into tradable securities, enabling institutions to raise funds and transfer risk. It is used for capital relief and risk transfer.

• Complexity and Risk: Securitisation transactions are complex and may lack transparency. Risks include model risk, legal and governance risks, counterparty risk, servicing risk, liquidity risk, and operational risk. These risks were amplified during the 2007-2009 crisis.

• Crisis Lessons: The 2007-2009 crisis highlighted that default and loss rates varied significantly across asset classes and regions. Certain products, regardless of pre-crisis ratings, performed poorly due to factors such as misaligned incentives, excessive leverage, maturity transformation, and complex structures.

• Need for Differentiated Regulation: A one-size-fits-all regulatory approach is no longer appropriate. The EBA proposes a two-stage framework to identify qualifying securitisations based on simplicity, standardisation, and transparency, and minimum credit quality of the underlying exposures.

• Capital Treatment: The current regulatory capital framework for securitisations in the EU heavily relies on external ratings, which have changed significantly since 2010. This has led to an increase in credit enhancement requirements and a departure from the neutrality of capital charges.

• Capital Neutrality: The paper recommends that the capital treatment for qualifying securitisations should aim to limit the extent of non-neutrality, ensuring a more even distribution of capital charges across tranches.

• Regulatory Reforms: Since the crisis, numerous regulatory reforms have been introduced at both international and EU levels, including CRD II, Basel 2.5, CRD III, Solvency II, and the CRA Regulation. These reforms have introduced risk retention, due diligence, disclosure, and liquidity requirements.

• Qualifying Securitisations: The EBA proposes specific criteria to identify qualifying securitisations, such as retention of economic interest, enforceable legal transfer of underlying exposures, simple payment waterfall structures, and transparency in transaction documentation and reporting.

• Capital Charge Recommendations: For qualifying securitisations, the EBA suggests a capital charge on the most senior tranche at the CQS1 level, similar to that for CRR-compliant covered bonds, to ensure consistency and fairness.

• Systematic Review: The EBA recommends a systematic review of the entire regulatory framework for securitisations, in comparison to other investment instruments like covered bonds and whole loan portfolios, to ensure that regulatory differences are justified and do not lead to unintended effects.

• Regulatory Arbitrage Risk: Any changes to the prudential framework should be balanced against the risk of regulatory arbitrage, which is more likely to occur during periods of risk complacency.

Key Information

Market Overview

• The EU securitisation market grew significantly before the crisis, peaking at over EUR 2 trillion in 2008-2009, but has since contracted.
• As of 2013, the outstanding amount was about EUR 1.5 trillion, roughly one fifth of the US market.
• RMBS (Residential Mortgage-Backed Securities) accounted for 59% of total issuance, with SME ABSs (Asset-Backed Securities) forming the second largest segment.
• The UK, Netherlands, Spain, and Italy are the largest securitisation markets in the EU.

Historical Credit Performance

• During the 2001-2010 period, 'AAA' rated securitisation products showed substantial variation in default rates.
• US RMBS subprime and CDOs had the highest default rates (around 16% for 'AAA' and 60% for 'BBB').
• EU RMBS and ABS products had near-zero default rates, while corporate ratings had a default rate of about 5%.
• The US structured credit segment had the worst performance in terms of realised and expected losses.

Regulatory Reforms

• CRD II: Introduced retention requirements, disclosure, and due diligence obligations.
• Basel 2.5: Revised securitisation framework and strengthened trading book regime.
• CRD III: Defined re-securitisation and increased capital charges for securitisations and re-securitisations.
• Basel III: Introduced liquidity standards such as the LCR, with specific conditions for RMBS to be considered HQLA.
• CRA Regulation: Requires disclosure of structured finance instruments and dual rating by at least two agencies.
• EMIR Regulation: Imposes bilateral and central clearing requirements for derivative transactions.

Qualifying Securitisations

• The EBA proposes a two-stage approach to qualify securitisations:
  • Stage 1: Ensure simplicity, standardisation, and transparency.
  • Stage 2: Ensure minimum credit quality of the underlying exposures.
• Key criteria include:
  • Retention of economic interest.
  • Enforceable legal and economic transfer of underlying exposures.
  • Simple payment waterfall structures.
  • No maturity transformation or liquidation risk.
  • Disclosure of data on underlying exposures on a loan-by-loan basis.
  • Quarterly reporting and transparency in transaction documentation.

Capital Treatment

• The current capital treatment for securitisations under the CRR is based on external ratings.
• The risk weight for the most senior tranche (20%) contributes to non-neutrality in capital charges.
• The EBA suggests reducing capital charges for junior tranches and increasing them for senior tranches (excluding the most senior) to achieve a more even distribution.

Recommendations

• Conduct a systematic review of the regulatory framework for securitisations.
• Compare it with the regulatory framework for other investment instruments.
• Ensure that the capital treatment for qualifying securitisations is more neutral and fair.
• Propose a capital charge for the most senior tranche at the CQS1 level, similar to that for CRR-compliant covered bonds.

Conclusion

Re-establishing a well-functioning and prudentially sound securitisation market in the EU is essential for enhancing the resilience of the European financial system. The paper underscores the importance of balancing regulatory reforms with the need to avoid unintended consequences such as regulatory arbitrage. A differentiated approach to securitisations, based on simplicity, standardisation, transparency, and credit quality, is proposed to ensure a more stable and efficient market.