Yves Mersch, Member of the ECB Executive Board, spoke at the 5th Anniversary of European Data Warehouse in Frankfurt. Mr. Mersch begins by addressing the reasons for ECB’s prioritization of the asset-backed securities (ABS) loan-level data initiative and summarizes the achievements in this area. He highlighted the contribution of this initiative toward the discussion on simple, transparent, and standardized (STS) securitizations, along with the potential for developing common loan-level templates for NPLs, which will then also help another corner of EU financial markets.
The loan-level initiative set an example of swift and convincing action to show that European ABS were, broadly-speaking, less risky than feared, said Mr. Mersch. This was done despite the many technical difficulties of establishing common templates covering EUR 1 trillion of assets from many different jurisdictions and asset classes. A set of common templates that were established are easily accessible to market participants. However, revival of the European ABS market is “still anemic.” The compromise text for STS securitizations was just published last week, following the trialogue procedure between the European Commission, Council and Parliament. The regulation will probably come into force only in 2019 while various important technical standards still need to be prepared in the months before that deadline. The final compromise version of the STS Regulation creates, for the first time, a system of registration and supervision for ABS data repositories established in the EU. Securitization repositories, as they are called, will be subject to the same ongoing governance, technical, and operational requirements as trade repositories under the EMIR framework. ESMA will register, authorize, and supervise the repositories and will have the same range of supervisory tools and sanctioning powers as it is already exercising in relation to trade repositories under the EMIR framework. ESMA will be tasked with developing regulatory technical standards on the requirements for securitization depositories in the coming 18 months.
ECB welcomes the finalization of the trilogue but has concerns over some aspects of the STS Regulation. For example, providing a role in the legislation for third parties in the STS certification process introduces moral hazard for investors, as investors would have fewer incentives to undertake independent due diligence. Additionally, this would increase complexity and burden public resources, given the need to supervise such third parties separately. Moreover, the compromise text no longer requires originators and sponsors to disclose the actual transaction contracts. Instead this transparency enhancement has been weakened so a summary of the relevant documentation will also be accepted. These and other aspects will need to continue to be assessed as the regulatory technical standards become available in the coming months. He also highlighted that a new frontier for having more transparency in the form of loan-level data could emerge. To this end, he pointed out that one possibility to address the large stock of non-performing loans (NPLs) could be to create an EU-wide template and reporting system for such loans, alongside minimum standards for transparency. Efforts to enhance the transparency and standardization of NPLs could foster the creation of a NPL market.
Related Link: Speech (PDF)
Keywords: Europe, Banking, Securities, STS Securitization, ABS Loan Level Initiative, NPLs, ECB
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