ECB Publishes Opinion on Proposals to Amend Securitization Framework

This opinion has been published in response to the August 2020 request of EU Council to ECB for an opinion on two proposals (referred to as proposed regulations). The first proposal is for a regulation amending Regulation 2017/2402 on a general framework for securitization and creating a specific framework for simple, transparent, and standardized (STS) securitization to help the recovery from the COVID-19 pandemic (the proposed securitization regulation. The second proposal is for a regulation amending the Capital Requirements Regulation (CRR or Regulation 575/2013) regarding adjustments to the securitization framework to support the economic recovery in response to the COVID-19 pandemic (proposed regulation amending the CRR). This second proposed measure involves the removal of regulatory obstacles to the securitization of non-performing exposures (NPEs), to maintain the lending capacity of credit institutions, given that an increase in NPEs caused by COVID-19 can be expected. It is based on the draft standards proposed by BCBS and published for consultation in June 2020.  

The following are the key highlights of the opinion and recommendations of ECB with respect to the two proposed regulations:

• ECB welcomes the proposal to standardize the synthetic securitization market through the introduction of STS criteria, which are likely to have a positive steering effect. However, as EBA recognizes in one of its reports, there are limitations in the data and transactions used in this analysis. Nevertheless, ECB recommends that a thorough monitoring of the STS synthetic securitization market is put in place, also highlighting that the preferential risk-weight treatment could be an incentive for credit institutions to increase their reliance on synthetic securitization for capital management.
• ECB supports the EC proposal to adjust the prudential treatment of NPE securitizations, in line with the recent consultation by BCBS, and recommends that the draft BCBS standards are reflected faithfully, unless there is a strong reason to deviate. In that respect, ECB recommends that the EC proposal should be adjusted, if necessary, to reflect the final BCBS standards. The draft BCBS standards strike a good compromise between risk-sensitivity and simplicity by defining a fixed 100% risk-weight for senior tranches of qualifying NPE securitizations. ECB also proposes to amend Article 249(3) of the CRR to be fully aligned with the BCBS standards, meaning that no minimum rating requirements are imposed on most of the unfunded credit protection providers, while requirements are imposed on unfunded credit protection provided by unregulated private entities in line with the BCBS standards.
• The definition of NPE securitizations in the proposed securitization regulation deviates from the definition proposed in the draft BCBS standards. However, ECB supports the approach proposed by EC. This is because credit institutions established in EU apply the NPE definition as set out in Article 47a(3) of the CRR for regulatory reporting and risk management purposes; the definition in Article 47a(3) of the CRR is more closely aligned with associated economic risks and bank practice than the parameter W. In addition, the definition of NPEs in Article 47a(3) of the CRR captures unlikely-to-pay exposures, in contrast to the definition proposed in the draft BCBS standards; some EU credit institutions have significant stocks of unlikely-to-pay exposures and would benefit from the proposals.
• ECB recommends an amendment to the proposed definition of non-refundable purchase price discount (NRPPD). ECB further recommends expressly excluding refundable purchase price discounts, which can undermine the risk transfer as the originator is still exposed to the performance of the NPEs.
• ECB recommends clarifying, for the avoidance of doubt, that the 100% risk-weight floor for NPE securitizations overrides the so-called "look-through approach" risk-weight cap for senior securitization positions pursuant to Article 267 of the CRR (if the cap results in a risk-weight below 100%), as expressly stated in the draft BCBS standards (see CRE 45.5).

Related Link: Opinion (PDF)

Keywords: Europe, EU, Banking, Securities, Securitization Framework, COVID-19, CRR, NPE, Credit Risk, STS Securitization, Regulatory Capital, Basel, BCBS, ECB