The EC’s unexpected announcements and proposed legislation last Friday, 24 July, to amend the Securitisation Regulation and to amend the CRR (nothing yet about Solvency II) to:
- promote the securitisation of NPLs
- create a regime for balance sheet synthetic securitisations
- make their regulatory capital treatment more benign
- tweak the rules on the regulatory capital implications of unfunded credit protection
were explicitly in response to the urgency of the need to take measures to help the economy recover from the COVID-19 pandemic. Timing is unclear. The proposals regarding NPL securitisation are to amend some rules (especially on risk retention) in the Securitisation Regulation and adjust the current, excessive, capital charges. As readers know, the EBA’s 23 October 2019 Opinion had noted that the 5% risk retention under Article 6 of the Securitisation Regulation and Article 10(1) of the risk retention RTS is calculated by reference to the nominal values of the NPLs, not the (discounted) purchase price paid for them, the risk retention cannot be held by the special servicer, which is illogical because it is the one with most skin in the game, because it will be on a success fee, the Article 9(3) verification requirements can be impossible for an acquired portfolio of NPLs and the regulatory capital position produces excessive capital charges.
The proposed Securitisation Regulation amendments deals with the first three of these points, first by defining what an “NPE securitisation” is, and then amending articles 6 (risk retention) and 9 (due diligence). The proposed CRR amendment regulation would implement “a targeted differentiated prudential treatment for STS on-balance-sheet securitisation exposures” taking into account the “reduced agency and modelling risk compared to non-STS deals” via a new Article 269a, which would make the senior tranche of an NPL securitisation subject to a flat risk weight of 100%, provided the NRPPD is at least 50% of the gross book value of the exposures; make all other tranches subject to the general capital requirements framework (with two specific technical adjustments (click here for more). The adjustments to the NPL prudential calibration are apparently based on the public consultation launched by the Basel Committee on 23 June 2020, rather than the proposals in the October 2019 EBA opinion. However, the Basel proposals may not be universally welcomed by the market: for example, the broad-brush 100% risk weights can mean higher risk weights compared to the existing regime, so the regulatory capital aspect could be controversial, even though in other respects there is much to like in the proposal.
The proposals on synthetics will probably be largely welcomed (even though they are not the totality of what the market has been asking for). They accept one of the recommendations in the High Level Forum on the Capital Markets Union’s June 2020 report to apply the same regulatory treatment to synthetics as to cash securitisations, and the EBA’s more hesitant (as regards capital treatment) conclusions about proposals for developing a STS framework for synthetic securitisation. So, it is proposed (via adding a new series of articles in “Section 2a”) to introduce a new regime for synthetics which would apply most of the same STS requirements as apply to cash securitisations, plus some others specific to synthetics e.g. requirements mitigating the counterparty credit risk on the protection seller, and to extend the treatment which Article 270 of the CRR currently allows to only a limited sub-set of synthetic securitisations. The EC also proposes amending CRR Article 249(3), which currently makes it a pre-condition of the recognition of unfunded credit protection for institutions using the standardised approach that almost any protection seller must have a minimum credit rating requirement.
and then 