On 7 July 2015 the European Banking Authority ("EBA") published a report including its opinion to the European Commission on qualifying securitisation. In the report the EBA provides criteria for qualifying securitisations and proposes a reduction in the risk weight to both senior and non-senior tranches of qualifying securitisations.
The EBA acknowledges that a one-size-fits all regulatory approach to securitisations may no longer be appropriate and that a distinction should be made between qualifying securitisations and other securitisations. The definition of a qualifying securitisation should follow a two-stage approach: first, the transaction should meet criteria ensuring simplicity, standardisation and transparency and, secondly, the underlying exposures should meet criteria ensuring minimum credit quality of the underlying exposures.
The proposed three pillars for qualifying securitisations (simple, standard and transparent) aim to mitigate the major drivers of risk in a securitisation, to the extent not related to the underlying exposures. The criteria for a "simple" securitisation include the safeguard that there should be a legal true sale, the assets should be homogenous and no leverage should be involved. For a securitisation to be "standard" it should, inter alia, provide for a retention of economic interest and interest and currency risks should be hedged (e.g. through derivatives instruments or the use of caps and floors) and for a securitisations to be "transparent" the documentation should provide for disclosure of data on underlying exposures on a loan-by-loan basis and periodic reporting.
The simple, standard and transparent securitisation framework is complemented by criteria ensuring minimum credit quality of the underlying exposures. The criteria include maximum risk weights, granularity criteria and regulatory underwriting standards.
In the report a distinction is made between term securitisation and short-term securitisation in the context of ABCP Programmes. For ABCP Programmes modified criteria are proposed.
In the report the EBA proposes a reduction of the Basel Committee on Banking Supervision 2014 proposals on risk-weights for qualifying securitisation. The reduction would apply to risk-weights to both senior and non-senior tranches of securitisations.
Overall, the EBA recommends that a systematic review of the entire regulatory framework applicable to securitisations is carried out both across the different regulations applicable to securitisations and in comparison with the regulatory framework applicable to other products, such as covered bonds and whole loan portfolios.
The European Commission will consider the report and opinion and may produce a legislative proposal later this year.
For the report and the opinion of the EBA on qualifying securitisation, click here .