For the debt to be eligible, the securities must be from the most senior part of a securitisation, which itself needs to be of at least €100 million ($135 million), according to the document. The securities also must mature within five years or less. Limits to the asset-backed debt that will be allowed would include that it must be from the "most senior tranche" of the securitisation, that the instruments must have an issue size of at least 100 million euros ($135 million) and that the “remaining weighted average time to maturity is 5 years or less,” according to the document, prepared for a June 16 meeting with national experts.
The European Commission plans centre on how to implement a rule published in 2013 by the Basel Committee on Banking Supervision. The measure, a key plank of global regulators’ response to the financial crisis, requires banks to have enough easy-to-sell assets to survive a 30-day funding squeeze. While the commission’s approach retains a Basel rule that securitised debt can’t count for more than 15 percent of banks buffers, it widens the range of instruments that can be used. The Basel committee had limited this to debt backed by residential mortgages. Securitised debt must be "highly liquid" to count under the rule, according to the commission document.
Asset-backed debt won’t be eligible for inclusion if it is based on “exposures to a credit-impaired borrower", such as someone who “has been the subject of an insolvency or debt rearrangement process within three years prior to the date of origination” of the ABS. More complicated structures such as so-called synthetic securitisations based on derivatives and re-securitisations also wouldn’t be allowed. Banks would also have to write down the securities by as much as 35 percent from their market value, when they include them in the buffers.
The commission said that it will publish plans for applying the liquidity rule by the end of this month. The measure is set to begin phasing in next year and to fully apply in the bloc as of 2018. The commission is also pressing ahead with plans to give banks more scope to include covered bonds in their liquidity buffers than foreseen by Basel, according to the document. The document retains plans to allow "extremely high quality covered bonds" to count for as much as 70 per cent of the buffers - a 75 per cent increase compared with Basel.
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