On 19 September 2017, the European Banking Authority (EBA) published a Discussion Paper (Paper) on significant risk transfer (SRT) in securitisation. The Paper builds on the EBA Guidelines on this topic and expands on the EBA’s monitoring activity of supervisory practices across the EU. The EBA’s proposals are based on the newly agreed EU securitisation framework which will come into force in the coming months. The consultation will run until 19 December 2017.
The review by the EBA found differing SRT frameworks and supervisory approaches and has identified the areas of assessment and recognition of SRT that can be enhanced. Many of the proposals are aimed at harmonisation and are designed to ensure that the reduction in own fund requirements is matched by a transfer of risk that is significant and commensurate.
EBA proposals for discussion
The Paper sets out the EBA’s assessment of the market and supervisory practices with respect to SRT and makes a number of proposals for discussion. These focus on the following areas:
- the process of SRT assessment, including a formal notification framework for SRT transactions, a requirement for the competent authority to provide feedback on whether the SRT was achieved or not in relation to the transaction and a requirement for the originator to submit additional notifications to the competent authority both in certain pre-specified circumstances and on an ongoing basis;
- the complex structural features of securitisation transactions, including the amortisation structure, call options, excess spread features, cost of credit protection (synthetic transactions only) and risk transfer self-assessment exercise (synthetic transactions only); and
- the quantitative SRT assessments, in relation to which the EBA proposed two options for reform. The first option is to specify a minimum thickness requirement of first-loss tranche and introduce a new quantitative test of commensurate risk transfer to improve the current first loss and mezzanine tests. The second option is to introduce a new test that has both a significant risk transfer and a commensurate risk transfer component, based on a comparison between post-securitisation own funds requirements on retained positions and pre-securitisation underlying risk.
Regulatory treatment of non-performing loans securitisation
A separate chapter is devoted to non-performing loans (NPLs) securitisation, which the EBA recognises to be one of the viable routes for the EU banking sector to tackle the resolution of the high levels of NPLs. The EBA sought stakeholders’ views in this area in order to assess the workability of the SRT framework proposed in the Paper and to understand whether any element of that framework may hinder the effective functioning of the NPL securitisation market.
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