The European Commission has proposed overhauling EU debt securitisation rules that were put in place in the wake of the 2008 global financial crisis, in an effort to free up bank capital and encourage lending.
The commission on Tuesday put forward plans for lowering capital charges for banks holding securitised assets and cutting red tape for investors and issuers. The measures form part of Brussels’ broader push to integrate the EU’s capital markets, which is seen as critical to boosting the continent’s flagging economic competitiveness.
Political will for a revision of the bloc’s prudential framework, viewed by many in the market as too restrictive, follows calls for a revamp last year by Mario Draghi, the former Italian prime minister and ex-president of the European Central Bank, and a mandate from EU leaders last year for “relaunching the European securitisation market, including through regulatory and prudential changes, using available room for manoeuvre”.
Investors have also urged politicians to reform the market — where assets such as corporate debt, car loans and mortgage borrowing are packaged up into securities that banks can sell to investors — claiming this could attract hundreds of billions of euros of financing for the bloc’s economy.
Maria Luís Albuquerque, EU financial services commissioner, said: “Today’s proposals will contribute to reviving the EU securitisation market by simplifying and enhancing our regulatory and prudential framework while preserving robust safeguards to ensure financial stability.”
“I clearly expect [banks] to use this fit-for-purpose framework to provide more funding to households and business.”
At the heart of the proposed changes are reductions to the minimum risk weights — how much capital a bank must hold against potential losses — for certain classes of securitised assets, particularly for high-quality tranches that meet the EU’s “simple, transparent and standardised” (STS) criteria for securitisation.
Under the current rules, senior positions in STS securitisations are subject to a minimum risk weight of 10 per cent. The commission is proposing halving that to 5 per cent, while the floor for senior non-STS tranches would drop from 15 per cent currently to 10 to 12 per cent.
A second major proposed adjustment concerns the formula for calculating banks’ capital requirements for securitisation exposures under existing EU regulation — the so-called p factor.
Critics have long argued the current formula unfairly inflates capital charges for certain classes of securitised assets. The proposal seeks to address this by reducing the p factor for senior STS tranches from 0.5 to 0.3, and for senior non-STS tranches from 1.0 to 0.6 — representing 40 per cent reductions.
Adam Farkas, chief executive of the Association for Financial Markets in Europe, said it was “encouraging that the commission’s proposals acknowledge the current lack of sufficient risk sensitivity of the capital framework”.
Separate proposals for insurers’ capital charges, viewed by the industry as holding back demand for securitised debt, are due in late July.
However, critics say the commission’s proposals undermine financial stability and international standards designed to prevent a repeat of the global financial crisis.
“What they propose is effectively going below the Basel standards,” said Julia Symon, head of research at non-profit Finance Watch. “The Basel accord was the only standard we had, and it had already been a compromise, now we’re going to dilute it.”
But EU officials defended the plans.
“The view we’re taking is we’re introducing a dimension of risk sensitiveness . . . to a standard which at the moment is very conservative. It’s in line with the spirit and the logic of the Basel standard,” said one official.
Brussels’ proposed tweaks to the securitisation framework also include a reduction in due diligence obligations for institutional investors, especially in cases where third-party due diligence has already been conducted by the issuer.
“Disclosure rules and transparency rules are going too far,” another EU official said, arguing the changes should insure that the bloc does not “impose costs on issuers [that are] not worthwhile”.
The reforms would also simplify reporting templates for issuers, aligning them more closely with existing ECB guidelines. The commission proposes allowing private securitisations — those not publicly listed — to report less granular data, while public transactions would remain subject to higher transparency thresholds.
Jillien Flores, chief of advocacy at the Managed Funds Association, which represents one-third of global hedge fund assets, said: “Streamlining these requirements will reduce unnecessary costs, support market participation and help attract more global capital into EU securitisation markets.”
The commission’s proposals follow years of complaints from market participants that Europe’s securitisation regime is too burdensome and conservative compared with jurisdictions such as the US, where securitisation plays a much larger role in funding.
Prior to the global financial crisis, the EU’s securitisation market was 87 per cent of the size of the US market. It is now down to 17 per cent, according to asset manager PGIM.
Taggart Davis, head of government affairs for Europe at PGIM, said: “We can’t unlearn the lessons of the financial crisis, we need to be careful about what happened there, but we also have to be confident that we have learnt our lessons, and perhaps we can engineer a system which embeds those lessons in the regulation but without starving market growth.”
The proposals must gather the support of a majority of EU countries and clear the European parliament — a process that could take months.
https://www.ft.com/content/8096dbf2-f91c-45cc-b546-d3b46d523778
