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Commenting on the publication of the European Supervisory Authorities’ (ESAs) response to the European Commission's Call for Advice on the review of the securitisation prudential framework, Shaun Baddeley, Managing Director of Securitisation at the Association for Financial Markets in Europe (AFME), said:
“We are very disappointed on first reading of the report. There is a
weight of evidence supporting recalibration of both the bank and
insurance prudential frameworks, but the ESA’s recommendations conclude
that no real change is needed at this stage. Postulating that it is
probably not worth making calibrations more risk sensitive and
proportionate because they cannot quantify the benefit is no
justification for inaction.
Regarding advice on the banking sector:
“There is a wide consensus among issuers and investors that existing
regulatory imbalances have been a decisive factor in the stagnation of
securitisation in Europe. It is fundamental to address aspects of the
regulatory framework which remain miscalibrated and are holding back the
tool’s potential to support the economy.
“The EBA makes eight recommendations to the Commission, which primarily
focus on resolving inconsistencies with Basel standards. None of these
deal head on with two key prudential challenges for banks that are
holding back the securitisation market in Europe, including the
miscalibration of bank capital for securitisation and the
disproportionate treatment of securitisation within the Liquidity
Coverage Ratio. Both of these challenges disincentivise banks from
participating in this asset class. What is needed here is a temporary
adjustment to the p factor until a review of the securitisation
standardised formula is concluded and any long-term adjustments are
made.
“On a positive note, the EBA does recognise the merit in rethinking the
formulation behind securitisation risk weights if this is done at the
Basel level.
“One of the EBA’s recommendations is to reduce the risk weight floor for originators of “resilient” transactions to support issuance of significant risk transfer transactions of granular SME and corporate portfolios, for example. However, this change will be negated for banks impacted by the phase in of Basel III, due to major distortions created by the output floor formulation for securitisation, as evidenced by recent AFME and Risk Control Ltd research.
Regarding advice on the insurance sector:
“EIOPA’s section provides no recommendations but posits that while there
may be logic in developing a risk sensitive framework, there is little
point in doing so, given the limited impact the implementation of a
proportionate framework would have. AFME disagrees with this view as it
disregards the evidence that in the run up to the implementation of
Solvency II, substantial insurance ABS assets under management were sold
as a result of the impact of Solvency II on their own capital
positions. What is needed here is for EIOPA to deliver on many of their
findings and introduce a risk-based framework that recognises the
difference between senior, mezzanine and junior risk for both simple,
transparent and standardised (STS) and non-STS securitisations and
assign appropriate capital charges at each level.