EBA published an opinion on the regulatory treatment of securitizations of non-performing exposures (NPEs). Securitizations can play an instrumental role in reducing NPE stocks in the balance sheets of credit institutions but such a role may be hindered by certain provisions in the EU securitization framework. The opinion recommends various amendments to the Capital Requirements Regulation (CRR) and to the Securitization Regulation to remove the identified constraints. The opinion is addressed to EC and contributes to the objectives of the action plan of the European Council to tackle non-performing loans in Europe.
The opinion explains that the regulatory framework imposes certain constraints on credit institutions using securitizations to dispose off NPE holdings. The constraints include:
- Very high capital requirements on investor credit institutions under CRR. The pre-eminent securitization capital methods (the SEC-IRBA and the SEC-SA) and the look-through approach lead to disproportionately high capital charges on NPE securitization positions when compared to the relevant benchmarks and, as a result, tend to overstate the actual risk embedded in the portfolio.
- Compliance challenges for certain risk retention and due diligence requirements under the Securitization Regulation.
The opinion, therefore, recommends that EC should consider a number of targeted amendments to CRR and the Securitization Regulation to remove these constraints while maintaining the integrity of the prudential framework. EBA also recommends EC to take action to clarify where the caps for securitizations laid down in Articles 267 and 268 of the CRR are applied to NPE securitizations. Furthermore, the potential amendments to CRR should be, to the extent possible, consistent with the comparable international standards. NPE securitizations are transactions backed by pools comprised exclusively, or almost exclusively, of NPEs at the time of inception. Though structurally similar to other securitizations, the underlying assets have distinctive features that set NPE securitizations apart from those from an economic substance perspective, namely due to the large discount on their nominal value and their specific underlying risks.
Keywords: Europe, EU, Banking, Securitization, Credit Risk, NPL, Opinion, CRR, Securitization Regulation, Non-Performing Exposures, EC, EBA
Previous ArticleUS Regulatory Agencies Join Global Financial Innovation Network
BoE published a statistical notice (Notice 2020/9) explaining the approach for treatment of payment holidays on the profit and loss return or Form PL.
BoE updated the known issues document for the statistical reporting Forms AS and FV.
FED announced individual capital requirements for 34 large banks and these requirements go into effect on October 01, 2020.
SRB published a set of documents to give operational guidance to banks on implementation of the bail-in tool.
BIS published an update on the G20 TechSprint Initiative, which was launched in April 2020 and aims to highlight the potential for technologies to resolve regulatory compliance (regtech) and supervisory (suptech) challenges.
OSFI published a letter that provides an update on the milestones for the implementation of the IFRS 17 standard on insurance contracts.
EBA updated the report on the implementation of selected COVID-19 policies.
The Financial Stability Institute (FSI) of BIS published a brief note that examines the supervisory challenges associated with certain temporary regulatory relief measures introduced by BCBS and prudential authorities in response to the COVID-19 pandemic.
BCBS is consulting on the principles for operational resilience and the revisions to the principles for sound management of operational risk for banks.
BoE updated the reporting template for Form ER as well as the Form ER definitions, which contain guidance on the methodology to be used in calculating annualized interest rates.