EC Adopts Capital Markets Package to Alleviate Impact of COVID Crisis

EC issued a proposal to amend Securitization Regulation (2017/2402) that lays down a general framework for securitization and creates a specific framework for simple, transparent, and standardized (STS) securitization to help in the recovery from COVID-19 pandemic. The proposed amendments include the following:

• Interaction and consistency between elements of the package—This proposal forms a legislative package with the amendments to the CRR. As pointed out by many stakeholders, the development of STS eligibility criteria for balance sheet synthetic securitization and addressing regulatory obstacles affecting non-performing exposure (NPE) securitizations would not be sufficient on their own to achieve the objective of optimizing the role that securitization can play in the economic recovery. They need to be accompanied by a new prudential treatment, including in the area of capital requirements, better reflecting the specific features of these types of securitizations.
• Addressing shortcomings in regulatory framework for securitization of NPEs—To tackle comprehensively the regulatory shortcomings of NPE securitization, this proposal puts forward a definition of NPE securitization, which is aligned with the work of BCBS. NPE securitizations are made subject to a special regime when it comes to fulfilling the risk retention requirement to better take account of their special characteristics. It is proposed that the risk retention requirement is calculated on the basis of the discounted value of the exposures transferred to the securitization special purpose entity. The proposal also clarifies the verification duties on originators when it comes to securitizing NPEs.
• Creating a specific framework for balance-sheet synthetic securitizations—The synthetic STS label should not be understood to mean that the securitization is risk-free, but rather that the product respects a number of criteria and that a diligent protection seller and buyer, as well as a national competent authority, will be able to analyze the risk involved. The proposed criteria are aligned as much as possible with those for traditional STS securitization, but they also take into account the specificities of the synthetic product and the different objectives of synthetic securitizations.

EC also issued a proposal to amend CRR (575/2013) regarding adjustments to the securitization framework to support the economic recovery in response to the COVID-19 pandemic. The proposed amendments include the following:

• Preferential treatment of senior tranche of STS on-balance-sheet securitization—It is necessary to provide for a more risk-sensitive treatment for STS on-balance-sheet securitization, in line with the EBA recommendation included in its report on STS framework for synthetic securitization. The consultation report recommends the establishment of a cross-sectoral EU framework for STS on-balance-sheet securitization that is limited to on-balance-sheet synthetic securitization and is based on a common set of eligibility criteria. It also recommends a targeted differentiated prudential treatment for STS on-balance-sheet securitization exposures.
• Removal of regulatory obstacles to NPE securitization—It is necessary to remove the existing regulatory constraints to the securitization of NPEs embedded in the current framework. Thus, the proposal is to amend the treatment of NPE securitizations by providing for a simple and sufficiently conservative approach based on a flat 100% risk-weight applicable to the senior tranche of traditional NPE securitizations and on the application of a floor of 100% to the risk-weights of any other tranches of both traditional and on-balance-sheet synthetic NPE securitizations that remain subject to the general framework for the calculation of risk-weighted exposures. The proposed treatment is aligned with the main elements of the approach currently being finalized by BCBS.
• Recognition of credit risk mitigation for securitization positions—The proposal is to amend Article 249(3), which introduces an additional eligibility criterion for the recognition of unfunded credit protection for institutions applying the standardized approach to calculate capital requirements for securitization exposures. It imposes a minimum credit rating requirement for almost all types of providers of unfunded credit protection, including central governments. The provision appears to be inconsistent with the general credit risk mitigation rules set out in the CRR, with the objectives of that Regulation, but also with the new international standards set by the revised Basel III framework imposing a minimum credit rating requirement only to a limited set of protection providers in case of securitization exposures. This amendment will enhance the effectiveness of national public guarantee schemes assisting institutions’ strategies to securitize NPEs in the aftermath of the COVID-19 pandemic.

Related Links

• Press Release
• Proposal to Amend Securitization Regulation (PDF)
• Proposal to Amend CRR (PDF)
• FAQs
• Staff Working Document (PDF)
• Overview of Capital Markets Recovery Package

Keywords: Europe, EU, Banking, Securities, COVID-19, CRR, Basel, NPE, Securitization Regulation, Securitization, STS Securitization, Credit Risk, Guarantee Scheme, Synthetic Securitization, BCBS, EBA, EC