12 June 2014

BIS: Yves Mersch: Next steps for European securitisation markets

“My first proposal to revive EU ABS markets is to find a more holistic approach to their regulatory treatment.

There has been a lot of discussion about various individual issues related to ABS: for example, excessive securitisation capital charges, transparency and risk retention improvements, higher credit enhancement requirements, as well as the current liquidity rule proposals, which I see as overly constraining. And regulators have responded by making efforts to overhaul the securitisation capital framework, categorise ABS in liquidity categories, finalise securitisation capital requirements for insurers, and reform transparency and disclosure requirements for these instruments. One example concerns "high quality" treatment across regulations. The BCBS' efforts to finalise the securitisation capital framework before end-2014 will not consider "high quality" preferential treatment. In a few weeks, however, the European Commission must identify which ABS are "high quality and liquid" in the Liquidity Coverage Ratio.

My second proposal concerns transparency and standardisation requirements for ABS products.

I wholeheartedly support disclosure for ABS. This is because ABS will always have the potential to be highly complex, which implies much more room for opacity than other standard financial products. My concern here is that prospectuses and broader transaction documentation must inform both legal and financial specialists. Some creative thinking on how to present the information in an accessible manner may help preserve legal precision while avoiding information overload.

My third proposal relates to the treatment of European ABS by credit ratings agencies.

Currently many ABS in stressed economies are constrained by the rating of the corresponding sovereign. The rationale put forward by rating agencies is that there are immitigable risks that affect all issuers and assets in a particular country, above all the sovereign. As regards calibration, some quantitative and many qualitative factors are taken into account by the agencies when setting this ceiling. Yet, I question whether this ceiling is appropriate. I recommend that market participants look closely at what the ECB is doing with our loan-level data initiative. We are providing much higher quality information on which they can make informed credit risk assessments of ABS, either on the basis of the individual underlying loans, or on the basis of the summary information made available in the respective data repositories.”

Full speech

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