Traditional securitisation is a funding technique converting on balance sheet exposures that are normally not tradable into tradable securities placed by the originator with the aim of raising funds in the markets. The transformation process entails the tranching of the credit risk related to the exposures being securitised; consequently, institutions also use the securitisation tool for significant risk transfer and capital relief purposes.
As documented in this report, one of the most important lessons of the 2007-2009 crisis is that defaults and losses associated with securitisation positions have varied substantially across different types of securitisations and regions. The crisis has also shown that the poor performance of certain products, irrespective of the pre-crisis rating level, was associated with recurring factors, including: i) misalignment of interest between originators and investors resulting in loose underwriting standards on the underlying exposures; ii) excessive leverage; iii) maturity transformation; and iv) complex structures. Complex transactions have been assessed by external rating agencies using erroneous modelling assumptions and have been placed with investors without adequate transparency standards.
The EBA acknowledges that a one-size-fits-all regulatory approach to securitisations may no longer be appropriate, as it may result in an unduly conservative treatment of transactions that are simple, standard and transparent, as well as being collateralised by relatively less risky exposures.
The regulatory approach to securitisations should incorporate a distinction between qualifying securitisations and other securitisations. The regulatory definition of ‘qualifying’ securitisation should follow a two-stage approach whereby in order to qualify for differential treatment, a securitisation transaction should first meet a list of criteria ensuring simplicity, standardisation and transparency and, as a second step, the underlying exposures should meet criteria of minimum credit quality of the underlying exposures.
The proposed criteria to identify simple, standard and transparent securitisations aim to capture and mitigate the major drivers of risk of a securitisation that are not related to the underlying exposures, as illustrated by the crisis. The proposed three pillars ensure many safeguards, including retention of economic interest, enforceable legal and economic transfer of the underlying exposures, simple payment waterfall structures, lack of maturity transformation and liquidation risk, disclosure of data on underlying exposures on a loan-by-loan level, where proportionate, as well as disclosure to investors of underlying transaction documentation, where appropriate, and periodic reporting. Securitisations with these characteristics should, as a minimum, result in more investor confidence in securitisation products and provide a contrast to the ‘post-crisis stigma’ that the market has attracted.
The framework proposed in this report does not cover synthetic securitisation transactions as the EBA acknowledges that defining a synthetic securitisation-specific qualifying framework requires further analysis and market assessment, given the different nature of synthetic transactions and the variety of market practices that currently exist in this segment. The EBA, however, stands ready to assist in the development of such a framework.
This report acknowledges the substantial improvements achieved with the BCBS 2014 revision of the framework with respect to the rules currently in force and takes that framework as a baseline to formulate re-calibration proposals applicable to ‘qualifying’ securitisations across the hierarchy of approaches, aimed at further increasing the risk-sensitivity of the bank capital treatment of securitisations.
The proposed criteria on simplicity, standardisation and transparency should ensure that all the risks arising in the securitisation, other than the pure credit risk related to the underlying exposures, are properly mitigated. For this reason the capital treatment proposed for ‘qualifying’ transactions should aim at more appropriate levels of non-neutrality of capital charges1. The requirements of the qualifying framework, as well as the empirical evidence on the performance of qualifying transactions, justify extending the re-calibration of risk weights to both senior and non-senior tranches of qualifying transactions.
The recommendations provided in this report in relation to the implementation of a qualifying securitisation framework in Europe will have to be revisited depending on the progress and decisions taken by the Basel and IOSCO Committees on the definition of a global Simple, Standard and Comparable (STC) securitisations framework, and on the re-calibration of the BCBS 2014 securitisation framework to provide regulatory recognition to STC securitisations. As formulated in this report, the ‘qualifying’ securitisation framework for term securitisations is consistent with the current status of the global STC criteria, while the proposed capital requirements re-calibration results from empirical and QIS analysis mostly based on data related to European transactions.
Re-establishing a well-functioning and prudentially sound securitisation market in the EU will contribute to strengthening the resilience of the European financial system by providing an alternative funding channel to the real economy and by enhanced risk-sharing. However, any changes to the prudential framework should be balanced against the risks of introducing regulatory arbitrages. This may not be particularly pronounced in the current environment, but as history tells us, it is more likely to occur in periods of risk complacency.
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