Edition 4 of this Briefing summarised a European Commission Green Paper which sought comments on how to ensure the supply and availability of long-term financing to the real economy, and specifically to small- and medium-sized enterprises (SMEs) within Europe. The Green Paper envisaged that securitisation could assist with the economic recovery, raising a specific question (question 14): "how could the securitisation market in the EU be revived in order to achieve the right balance between financial stability and the need to improve maturity transformation by the financial system?". The European Commission has now issued a Communication which builds on the ideas set out in the Green Paper with a set of concrete actions that are intended to: mobilise private sources of long-term financing; make better use of public finance; develop capital markets; improve SMEs' access to financing; attract private finance to infrastructure; and enhance the overall environment for sustainable finance. Particularly in relation to securitisation, the Communication notes that several regulatory actions have been taken to date to improve standardisation and transparency, and improve investor understanding of the product. These include the 5% skin-in the-game retention requirements, enhanced disclosure obligations, the regulation of Credit Rating Agencies involved in rating structured finance transactions, and enhanced capital requirements. However, the Commission recognises that there has been no substantial recovery in the securitisation market so far (apparently due in part to the stigma attached to (some of) these instruments, but also as a result of the (drawn-out uncertainty over their) regulatory treatment). Specific actions to be taken by the Commission in this area are: (i) work on a definition of "high" quality securitisation products and the corresponding possible preferential regulatory treatment for high quality deals; and (ii) work with the Basel Committee and the International Organisation of Securities Commissions (IOSCO) to develop global standards on risk-retention, high quality standardisation and transparency. It will be interesting to see how the European Commission coordinates these tasks with the US SEC, CFTC and other US regulators which have (in some areas) explicitly taken a different regulatory approach to that of the EU. The Communication also mentions covered bonds - the Commission will review the treatment of covered bonds in the Capital Requirements Regulation (CRR) and launch a study on the merits of introducing an EU-wide framework for covered bonds. Given that the majority of EU Member States have introduced specific legislative frameworks for domestic covered bond markets in recent years, this will be an interesting development.
Other actions the Commission undertakes to complete in this area include finalising the implementing measures for the Solvency II Directive (by September 2014 at the latest), publishing a report on the appropriateness of the increased capital requirements for banks under the CRR, the preparation (during the first half of 2014) of a Delegated Act (to take the form of a Regulatory Technical Standard) on the Liquidity Coverage Ratio and the final calibration of the Net Stable Funding Ratio, launching a study on the possible introduction of an EU savings account, issuing a Communication providing guidance to 'national promotional banks' (which are similar to the European Investment Bank / European Investment Fund), publishing a report on promoting better coordination among national credit export schemes, developing implementing measures for the revised Markets in Financial Instruments Directive, conducting a study on the private placement market, carrying out a mapping of EU and national practices affecting the availability of SME credit scoring information, evaluating the possibility of making available information on national infrastructure investment plans, considering revisions to the Shareholder Rights Directive and related corporate governance actions, reviewing accounting standards, in particular to determine whether the use of fair value is appropriate, and considering a review of the tax bias towards debt financing, which may encourage companies to take on debt. This Briefing will report back on those of the Commission's actions and workstreams affecting structured finance markets and participants as they develop.
Along with the Communication, the Commission has also released a proposal to revise the Institutions for Occupational Retirement Provisions (IORP) Directive to improve the development of occupational pensions (and will ask the European Insurance and Occupational Pensions Authority (EIOPA) for advice during the second half of 2014 on the objective of creating a single market for pensions), and a brief Communication on Crowdfunding, which is a growing source of finance for SMEs, which notes that the Commission will establish an Expert Group on Crowdfunding to provide advice on the way ahead.
European Commission Green Paper
European Commission proposal to revise the Institutions for Occupational Retirement Provisions (IORP) Directive
European Commission Communication on Crowdfunding