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The European framework for simple, transparent and standardised or ‘STS’ securitisations was formally adopted by the European Parliament on 26 October. The adoption by the Council is expected soon and will lead to the conclusion of a process that has taken many years of hard work. The STS Regulation is one of the cornerstones of the Capital Markets Union (CMU) project to build a single market for capital in the EU.
The reputation of securitisation or asset-backed securities (ABS) has been severely tarnished by the financial crisis, reflecting both the prominent role of ABS involving complex, opaque structures with poorly underwritten loans and the misuse of derivatives.
Moreover, the market was over-reliant on a highly leveraged investor base depending on short-term wholesale funding. Although these practices were more prevalent in the US, the European securitisation market was also impaired. By consequence, all ABS were demonized.
The ECB together with the Bank of England were early supporters of a better functioning securitisation market for transactions that comply with the concept of simple, transparent and standardised ABS and duly take into account the lessons learnt of the crisis.
STS Regulation also requires a system of registration and supervision for ABS data repositories established in the EU. ‘Securitisation repositories’, as they are called, will be subject to the same ongoing governance, technical and operational requirements as trade repositories under the EMIR framework. They will be expected to store not just loan-level data, but also all other information which the Regulation requires, such as transaction documentation. The repositories will be registered, authorised and supervised by ESMA. The ECB will wholeheartedly support ESMA in completing its tasks.
The ECB places great importance on the health of the European securitisation market. The ABS loan-level initiative has made an important contribution in ensuring a high degree of transparency to enable investors to assess the embedded risks of securitisations.
Obviously, ABS had to become safer after the experience of the Great Financial Crisis, in particular with securitized US-subprime mortgages. Regulators and legislators have acted accordingly, and the work has not yet been completed. But we should not throw the baby out with the bath water. Instead, the potential of healthy securitizations should be exploited.
In line with the Commission goal to revive the securitisation market in Europe, in order to broaden investment opportunities for investors and boost lending to households and businesses a number of barriers need yet to be overcome. The STS Regulation could make an important contribution. Much work has already been conducted, nevertheless many important technical standards still need to be finalised and some other uncertainties still remain. In this context, we have to be mindful amid the interdependencies of different pieces of legislation.
Calibration of Solvency II is essential for insurance companies as investors in securitisation. Further clarity of securitisation special purpose entities under the EMIR framework is needed. Finalisation of Basel III may impact securitisation as a means of transferring risk. These are challenges that lie ahead of us.