Ambassadors of EU member states agreed on the mandate of European Council on the Capital Markets Recovery Package, to support economic recovery from the COVID-19 crisis. The amendments in the package focus on the the securitization framework as laid down in the Securitization Regulation and the Capital Requirements Regulation (CRR), the Markets in financial instruments directive (MiFID) II, and the Prospectus Regulation. European Council lends full political support to the EC package, while suggesting changes to some of the detailed provisions.
With respect to securitizations, the proposed amendments extend the existing EU framework for simple, transparent, and standardized (STS) securitizations to synthetic securitizations. Synthetic securitizations are an important credit risk management tool for banks, as they 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. In addition, regulatory obstacles to the securitization of non-performing exposures are removed to support banks in offloading non-performing exposures from their balance sheets in the context of the COVID-19 crisis, while maintaining high prudential standards.
European Council suggests complementing the EC proposals with a dedicated prudential treatment for synthetic excess spread (SES) in the CRR. SES is a credit enhancement tool and a common feature in synthetic securitization transactions; however, this tool could be misused for regulatory arbitrage. The introduction of dedicated and comprehensive regulatory capital requirements for SES addresses the risk of a potential misuse of SES for arbitrage purposes for all synthetic securitization transactions, irrespective of whether they meet the STS criteria or not. On the basis of this mandate, the presidency will start negotiations with the European Parliament as soon as the Parliament has adopted its position.
Keywords: Europe, EU, Banking, Securities, COVID-19, CRR, Basel, Securitization, Securitization Regulation, STS Securitization, Capital Markets Union, Credit Risk, NPE, EC, European Council
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