08 December 2016

European Parliament: Securitisation: diversifying funding and releasing bank lending to real economy

Securitisations: products for professionals

In their vote, MEPs decided to introduce tighter requirements for all securitisations. For instance, originators and investors should be restricted to appropriate type of entities. There might be several actors active in securitisation process where individual loans and other financial assets are bundled together into tradable securities, which are then sold on to investors.

• Original lender: a non-financial company that wants to reduce the uncertainty involved in its investments and securitises its exposures
• Sponsor: a financial institution that establishes a securitisation transaction by purchasing exposures from the original lender
• Originator: a financial company, such as bank or insurance company, that either buys exposures to securitise them or pools income-producing assets (such as mortgages or other loans) and sells them on
• Securitisation Special Purpose Entity (SSPE) which is a trust, limited liability company or corporation set up in order to create the securities and sell them on the market (but it cannot be originator or a sponsor) - the only purpose of an SSPE is to protect investors in securities in the event of an originator becoming insolvent

MEPs stress that at least one of originators, sponsors or the original lender should be a regulated entity such as a credit institution, an insurance undertaking, an investment firm (UCITS or Money Market Funds), or a  development bank (EIB).

Aligning interests

To make the market more transparent and avoid moral hazard, MEPs sought to ensure that the interests of securitisation participants converge. They proposed that the originator, sponsor or the original lender in a securitisation process should always retain a material net economic interest, measured at the time of origination, in the securitisation of not less than 5% or 10% in specific situations due to a credit risk or securitisation of revolving exposures depending on the modality for retaining the risk

To cover micro and macro prudential risks, the European Systemic Risk Board (ESRB) or European Banking Authority (EBA) should be mandated to increase required retention rate to 20% in light of market circumstances given that the ESRB is responsible for the soundness of a financial system as a whole and the EBA for individual financial institutions, said MEPs.

Transparency

The originator, sponsor and SSPE of a securitisation should make available information on the exposures underlying the securitisation on a quarterly basis as well as documentation essential for understanding the transaction such as an asset sale agreement or description of priority payments to: investors, potential investors and competent authorities in member states.

MEPs also mandated that reporting to supervised securitisation repositories where investors in securitisation position could find information about underlying exposures in securitisations, business sector, investors in such securitisations, etc.

Securitisations: no longer black boxes

The MEPs strengthened the criteria for a securitisation to be considered as transparent, simple and standardised. Furthermore, they restricted issuance of such securitisations to entities established in the Union, unless they are established in a third country in which the requirements are equivalent to those in the EU.

Moreover, re-securitisation (in other words when at least one of the exposures in the securitisation is itself the result of a securitisation) should be banned, said MEPs.

Preferential capital treatment of STS securitisation

In a separate vote, MEPs recommended a preferential capital treatment for STS securitisation, a new hierarchy for risk calculation methods, including a preference for sound internal and supervisory approaches to approaches relying on external ratings and easing financing of SMEs via a specific treatment for the safer securitisations of SME loans.

Next steps

ECON voted to give a mandate to the Rapporteurs and shadows to engage in informal negotiations with the Council as of January 2017.

Press release

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