Eight years on from the credit crisis, the drive to rehabilitate securitisation continues.
The most recent body to speak up for the increasingly regulated structures is the European Banking Authority, which last month published an Opinion and an accompanying Report on the establishment of a European framework for qualifying securitisations for the purposes of determining favorable regulatory capital treatment.
It has been recognised that a common regulatory approach to securitisations across the board has arguably resulted in the overly cautious regulatory capital treatment of straightforward and low risk securitisations. The EBA Report illustrates how capital charges should be lowered to recognise such transactions.
To be a qualifying term securitisation attracting preferential regulatory capital treatment, the EBA are recommending two criteria be satisfied. Firstly, the securitisation must be simple, standard and transparent to mitigate the major drivers of risk of a securitisation not related to underlying exposures. The structure should ensure that the securitisation process does not add ‘excessive’ additional risk and complexity on top of the credit risk of the underlying assets. Certain safeguards must be imposed, including retention of economic interest, enforceable legal and economic transfer of underlying exposures, full transparency to investors, simple payment waterfalls, lack of embedded excessive leverage and lack of excessive maturity transformation. All entities should be provided with the right incentives, and the transaction should not replicate the originator-to-distribute model seen pre-crisis. Secondly, the underlying exposures should meet criteria of minimum credit quality to prevent risky assets being included in the asset pool, including regulatory underwriting standards, granularity criteria and form of maximum risk weights.
The introduction of qualifying securitisations is intended to lead to more standardised products and harmonised practices in securitisation. It will also help re-establish investor confidence in the market, and potentially broaden the investor base, whilst creating a more risk-sensitive regulatory framework that can set apart securitisation products with different risks.
The EBA notes that any qualifying securitisation structure in Europe will have to be revisited in light of developments on the subject matter of simple, transparent and comparable securitisations at the global level by the Basel and International Organisation of Securities Commission committees.
The EBA is not recommending that securitisations be let out of the capital treatment dog house. Far from it. However this is at least the case for more sensibly constructed confinement. More lobbying and consultation lies ahead, but the EBA is to be applauded for its measured and pragmatic recommendations.