SME ESNs, similar to covered bonds, could be structured as a dual recourse instrument. Due to the high-risk profile of SME exposures, the EBA suggests a more restrictive framework, especially with respect to the coverage, the liquidity and the disclosure requirements and suggests strict eligibility criteria at both loan and pool level and a minimum level of over-collateralisation of at least 30%.
In terms of capital requirement, it is advised that no preferential treatment (i.e. similar to covered bonds) is granted. However, a differentiated risk-weight treatment compared to unsecured notes could be considered subject to certain considerations.
The EBA does not recommend the creation of an infrastructure ESNs. A dual recourse structure for Infrastructure loans is not appropriate given the lack of granularity in a cover pool, the complexity of the loan structures and the specific and different nature of infrastructure projects making it very difficult to create a high quality dynamic cover pool of infrastructure loans.
The EBA recommends the European Commission to investigate the case for a new distinct asset class for high-quality project finance loans in the form of a standardised EU infrastructure bond. Further EBA work would be needed to specify the features and the applicable framework for this potential new product.
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