On behalf of the European Council, EU ambassadors endorsed targeted amendments to the EU capital market rules provisionally agreed with the European Parliament last week to support economic recovery from the COVID-19 crisis. The legislative changes include amendments to the Markets in Financial Instruments Directive (MiFID) II, the Prospectus Regulation, and the securitization framework. To facilitate securitization, the existing EU framework for simple, transparent and standardized (STS) securitizations will be extended to cover synthetic securitizations, which enable banks to transfer the credit risk of a set of loans, typically large corporate loans or small and medium-size enterprise (SME) loans, to investors.
The agreed changes will free up bank capital for further lending and allow a broader range of investors to fund economic recovery from the COVID-19 crisis. To encourage use of the STS label, preferential risk-weights are being introduced for senior tranches retained by the originator, though EBA will closely monitor the market for such products to ensure that this does not lead to excessive leveraging of banks. The new rules also remove regulatory obstacles to the securitization of nonperforming exposures. This is done by broadly aligning nonperforming exposure rules with international standards and ensuring their prudential soundness, while allowing originating banks to use risk-sensitive modeling practices. This will help banks to better manage their balance sheets when dealing with the economic fallout from the COVID-19 pandemic, to secure their lending capacity in the medium term and to share risks more broadly with the non-bank financial sector. The European Parliament and Council will now be called on to formally adopt the amendments without further discussion, possibly in February 2021, after the usual legal-linguistic revision of the text.
In a separate announcement, European Council reached an agreement on a general approach on the proposal for a European climate law, including a new EU greenhouse gas emissions reduction target of at least 55% by 2030 compared to 1990, following the guidance of the European Council given in December 2020. The main aim of the European climate law is to set into legislation the objective of a climate-neutral EU by 2050. In addition, the Council also approved conclusions entitled "Making the Recovery Circular and Green" in response to the EC "Circular Economy Action Plan" for a cleaner and more competitive Europe. The conclusions aim to provide comprehensive political guidance on a broad range of actions foreseen in the Action Plan. The conclusions highlight the role of the circular economy in the recovery from COVID-19 and make a link to digitalization, underlining the importance of digitalization in achieving full potential of the circular economy. The Action Plan is a key element of the European Green Deal and is closely linked to the European Industrial Strategy. The European Parliament and Council also agreed to an amendment of the Transparency Directive, allowing member states to delay by one year the application of the European Single Electronic Format (ESEF) requirements for listed companies' annual financial reports, provided that they notify EC of their intention to do so. Listed companies that wish to publish their ESEF annual financial reports in 2021 will still be able to proceed. The amendments will apply 20 days after publication in the Official Journal of the European Union.
- Press Release on Amendments to Capital Market Rules
- Amendments to General Securitization Framework (PDF)
- Amendments to CRR Securitization Framework (PDF)
- Press Release on Approach on Climate Law Proposal
- Press Release on Conclusions on "Making the Recovery Circular and Green"
- Notification on Amendment of Transparency Directive
Keywords: Europe, EU, Banking, Securities, COVID-19, CRR, Basel, Securitization, Securitization Regulation, STS Securitization, Capital Markets Union, Credit Risk, Climate Change Risk, ESG, ESEF, EC, European Council
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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