EBA published a report that contains proposals for developing a simple, transparent, and standardized (STS) framework for synthetic securitization under the Securitization Regulation (2017/2402). The proposal includes a list of criteria to be considered when labeling the synthetic securitization as STS and provides the pros and cons of a potential differentiated capital treatment for this type of securitization. The proposal is limited to balance-sheet securitization.
The report contains an extensive analysis of the market developments and trends related to synthetic securitization in EU; this includes data on the historical default and loss performance of the synthetic transactions, both before and after the financial crisis (up until the end of 2018). The report examines rationale behind the STS synthetic product and assesses the positive and negative implications of its possible introduction. Based on the analysis conducted, EBA recommends the following:
- One recommendation is to establish a cross-sectoral framework for STS synthetic securitization that is limited to balance-sheet securitization.
- To be eligible for STS status, a synthetic securitization must comply with the proposed criteria on simplicity, standardization, and transparency.
- EC should consider the pros and cons related to a potentially differentiated capital treatment for STS balance-sheet synthetic securitization; any potential future proposal for STS synthetic securitization should be accompanied by a mandate to EBA to monitor the functioning of the STS synthetic market.
The report sets out a list of STS criteria for synthetic securitization. Among the proposed STS criteria are requirements on simplicity, standardization, and transparency—similar to those applied to traditional securitization. In addition, the report includes other relevant criteria for synthetic transactions, such as those for mitigating counterparty credit risk or for addressing various structural features of synthetic securitization.
Keywords: Europe, EU, Banking, Securities, Synthetic Securitization, Counterparty Credit Risk, Securitization Regulation, STS Securitization, EBA
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