EBA Opinion on Regulatory Treatment of NPE Securitizations
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.
Related Links
Keywords: Europe, EU, Banking, Securitization, Credit Risk, NPL, Opinion, CRR, Securitization Regulation, Non-Performing Exposures, EC, EBA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
CSRC Finalizes Rules for Management of PE Assets of Securities FirmsRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
