Joint-Committee of the ESAs response to the Commission is published - expected disappointment has materialised

Today, the Joint-Committee of the ESAs (grouping the EBA, EIOPA and ESMA) has published the long awaited response to the European Commission's Call for Advice on a possible reform of the securitisation capital calibrations under CRR and Solvency II. The response comes in two reports: one for banking and one for insurance. These can be found here and here.

As they have just been published, we have yet to read the full conclusions. But the EBA announcement page gives some indication as to the proposals (or lack thereof) contained in the documents.

For the CRR, the EBA has proposed to lower the floor for senior tranches of some STS securitisations from 10% to 7%. Crucially, they do not appear to have taken the opportunity to propose any changes to the infamous p factor. The p factor is the number used in the CRR to account for "agency risk" in securitisations. As PCS has pointed out numerous times, the entire STS regime is designed to eliminate agency risk in securitisations. PCS is not aware of a single securitisation specific agency risk that is not accounted for in the STS criteria.

Unfortunately, the rejection of any amendment to the p factor is not only a missed opportunity to align STS securitisation's capital requirement to the actual risks. It also negates, in the medium term, any value to the proposed lowering of the floor. From January 2025, the introduction of output floors in the final implementation of the Basel III rules will, without change to the p factor, wipe out any benefit from the lower floor.

The EBA also did not take the opportunity to make meaningful changes to the Liquidity Coverage Ratio eligibility criteria. This is notwithstanding the increasing amount of evidence as to the liquidity of high quality securitisations such as this quantitative analysis by Risk Control. (It does seem to propose fixing a problem with ratings limits though, although PCS needs to read the proposal with care to gauge its import).

As for Solvency II, EIOPA proposes nothing. Based on the announcement - but without having read the full report - EIOPA assets that, since the original introduction of STS in Solvency II did not lead insurance companies to buy STS securitisations there is no value to the regime. We would suggest an alternative conclusion: since the introduction of the STS regime in Solvency II was accompanied by grossly excessive capital requirements, it gave no incentive whatsoever for insurance companies to purchase high quality securitisations. It was not the introduction of the STS regime that led to the absence of insurance investors but the failure to see through the STS reform to its logical conclusion by the introduction of the correct and appropriate capital requirements.

PCS continues to be puzzled by the assertion that the Solvency II calibrations are fit for purpose when the capital requirements for an illiquid pool of whole mortgages remains lower than the capital required to purchase a highly liquid AAA rated senior tranche of a securitisation benefiting from substantive credit enhancement of the same pool of mortgages.

PCS hopes that careful reading of the two reports may yield better news but we are not optimistic.

Stakeholders' letter to European policy makers: "Securitisation cannot play its vital role for the European economy without reform"

PCS has added its name to a securitisation market stakeholders' letter to European policy makers.

In addition to PCS, the letter is co-signed by AFME representing wholesale markets, the European Banking Federation representing the banking sector, Leaseurope representing the leasing sector, Eurofinas representing consumer lenders, IACPM representing credit portfolio managers as well as the DSA, Europlace and TSI respectively representing market participants based in The Netherlands, France and Germany.

The letter comes back to themes that those who follow PCS have often seen us write about. The importance of a safe but deep securitisation market for the health and growth of the European real economy, the increased urgency of fixing that market in the face of the green challenge and the need to complete the welcome reforms started with the passage of the Securitisation Regulation especially in respect of the CRR calibrations, the Solvency II calibrations and the disclosure regime.

Considering the breadth of representation encompassed by the signatories - in addition to PCS' own independent voice - we hope the letter will be taken to heart by policy makers.

PCS responds to the EBA's consultation on the draft "homogeneity" RTS

PCS filed its response to the EBA's consultation on the draft "homogeneity" RTS. Broadly, PCS is very supportive of the EBA's overall approach. We are especially in agreement with the idea of keeping a single definition of "homogeneity" for all types of STS transactions, whether true sale or synthetic. We also agree with the need to clarify the definition of "large corporate". We do, however, depart from the EBA in the best way to do this and have concerns with the proposed solution being the only solution on offer. Our response also draws attention to the vital importance of the proposed transition period. The EBA proposal is welcome and, even, essential if we wish to avoid a prudential regulation exacerbating rather than calming systemic risks. But for it to work, a transition period of appropriate length is required.

PCS responds to EBA Consultation on Synthetic Express Spread

PCS filed its response to the European Banking Authority's consultation paper on synthetic excess spread. Although this might appear the most abstruse of technical issues, fit only for quants and CRR geeks, the truth is - as PCS sets out in the introduction to its response - that this highly technical matter will have substantially damaging effects on the European economy as a whole if not properly calibrated.

Unfortunately, PCS feels that the current EBA proposals are indeed not only miscalibrated but would result in the virtual eradication of the use of synthtetic excess spread in Europe. This, we feel, is unnecessary as our response - and those of others - sets out a solution which entirely eliminates the legitimate concerns of policy makers regarding the abuse of synthetic excess spread without making its use practically impossible.

Even if you do not wish to plunge deeply in the technicalities, we do invite you to read our response as it does try, as best one can, to make the issue understandable.

Commission's report on the securitisation regulation is out - but the real battle is yet to come

The European Commission released its report on the review of the Securitisation Regulation on Monday. This was mandated by the Securitisation Regulation itself as part of a normal review process often found in European legislation. There was little to cause surprise to anyone who had been listening to the clear messaging coming from Brussels. The headline was that the Regulation having come into force in 2019 the Commission felt it was too early to tell whether it was working and so no meaningful changes were being proposed. Suggestions of changes to the disclosure rules were welcome, the rejection of a change in the definition of private transactions less so.

But the key point is that the real battlefield that will determine the success or failure of the European market does not lie with a serious root and branch reform of the Securitisation Regulation. It lies with the necessary changes to the prudential rules, specifically the capital requirements under the CRR and Solvency II for insurance companies and the rules on the Liquidity Coverage Ratio. Those were explicitly not in scope of this review but are subject to a now overdue response to a call for advice by the Commission to the Joint Committee of the ESAs. In addition, rule changes to disclosure, especially for private transactions could be impactful. Those battles still lie in our future.

PCS and many market participants though reject the notion that the rules are too recent to be changed and would be loath to see this argument trotted out to justify inaction on the prudential front where incontrovertible cases for change can be made.

EBA publishes consultation on synthetic excess spread

The European Banking Authority has just launched a consultation on the treatment of "synthetic excess spread" or "SES".

The issue of the capital treatment of synthetic excess spread in the context of synthetic STS securitisation is a topic that is as arcane as it is important.

We will not review here the arguments and possible approaches as this would take way more space that is appropriate for a news item.  To summarise, though, in a synthetic securitisation the originator and the investor can agree to an amount which will be deducted from any losses suffered on the securitised pool before the investor is required to make a protection payment.  This is designed to replicate synthetically the effect of "excess spread" in a cash deal, where a lender does not suffer real cash losses if the interest paid on performing assets is sufficient to compensate for losses on the defaulting assets.  Since this amount is just an agreed number (rather than, as in a cash deal, the actual cash received from borrowers) it is called "synthetic excess spread".

Synthetic excess spread is controversial and viewed with suspicion by regulators as it can, in theory, be used to generate regulatory arbitrage.

During the passage of the amendment to the Securitisation Regulation that ushered in synthetic STS, some voices were raised advocating the banning of any use of SES in STS synthetic transactions.  Many, including PCS, argued that this was unnecessary and illogical since the device, properly deployed, only replicated synthetically a totally uncontroversial aspect of true sale securitisation.  The compromise chosen by the legislators was to allow it but impose a capital cost on its use.  We expressed the view at the time that this was the wrong answer and that a perfectly good answer had been suggested by the EBA itself in its original report which we were happy to endorse.  But there we are.

Having chosen the solution of a capital cost for the SES, the legislators then left it to the EBA to come up with an amount.  This consultation, deadline 14 October, solicits the market's views on the proposed EBA approach to calculating that amount.  PCS will, of course, be responding.

EBA publishes consultation on updated homogeneity

The European Banking Authority has just launched a consultation on the homogeneity of the underlying exposures in STS securitisation.

The consultation is addressing the issue of the homogeneity in the context of synthetic STS securitisation. Although the scope is extended to also cover on-balance-sheet (synthetic) securitisations, at the same time it establishes the same criteria for the assessment of homogeneity for all securitisations.

More specifically, given the relevance of corporate and SME loans in the context of synthetic securitisations, adjustments have been made to the type of obligor to reflect the current market practices and the credit risk assessment approaches applied to those asset types.

At the same time the in the proposal, we see that similar changes are made to the respective homogeneity factor for all relevant asset types. The proposal further specifies the asset type for credit facilities provided to enterprises, where similar underwriting standards are applied as for individuals.

This consultation, deadline 28 October, solicits the market's views on the proposed EBA approach.  PCS will, of course, be responding.

PCS files its response to EIOPA’s consultation

PCS filed its response to EIOPA’s disappointing consultation on a possible reform of the capital requirements for insurance companies investing in securitisations.

The response may be found here.

The consultation was, in our view, a major disappointment. EIOPA’s preliminary conclusions – underlined by their statements at a public roundtable attended by PCS – were that the current framework was “fit for purpose”.

For all the reasons set out in our response, PCS feels that this is not borne out by the facts and that the assertion itself as set out in EIOPA’s consultation document feels more like an “act of faith” than a genuinely reasoned conclusion.

We hope that the responses provided by stakeholders will lead EIOPA to reconsider the importance of fixing a framework that is unfair, inaccurate, and deeply damaging to the prospects of the European economy as well as a source of potentially destabilising regulatory arbitrage.

PCS responds to the Joint-Committee's Consultation on Sustainable Disclosure for STS

PCS has responded to the Joint-Committee of the European Supervisory Authorities on its consultation regarding the optional disclosure relating to sustainability of the assets securitised through an STS transaction.

Our response can be read here.

Acknowledging the very narrow mandate that had been given the Joint-Committee and the challenges this posed, PCS nevertheless believes that this was the wrong mandate, at the wrong time for far too narrow a sub-set of capital market instruments.  Through no fault of the committee, this feels like another siloed regulatory endeavour that risks again punishing unnecessarily securitisation and tilting yet further an already unlevel playing field away from allowing securitisation to recover and play a full role in financing the transition to a sustainable economy.

To understand our approach, we invite you to read only the General Considerations section of our response.  It covers merely three pages.  (Although hard core players are welcome to read the full thirteen page document, of course.)

The Cinderella Regulation - EIOPA launches a consultation on Solvency II capital

We have previously referred to the issue of capital calibration for securitisations purchased by insurance undertaking as the "Cinderella issue".  Of all the issues on which the European Commission  has asked the ESA's to provide advice, it is both the least noticed and yet, in our view, the most important of the unfinished reforms begun with the passing of the Securitisation Regulation.

Today, insurance companies are holding a minuscule percentage of securitisations in their books - just above 2%.  Their holdings of high quality STS securitisations are in homeopathic amounts at around 0.05%.  Yet, if we are to see a revival of a securitisation market in Europe that mobilises non-bank savings to fund the economy, the return of insurance companies is essential.

Yesterday, EIOPA, as part of gathering evidence for its report to the commission, issued a consultation (here)

PCS welcomes this consultation and urges all concerned stakeholders to participate.  We note though with some disappointment the very short period in which the market is asked to respond .  The deadline for responses is 13 July. Less than four weeks in the summer months for a consultation likely to be heavy on data that needs to be gathered and marshalled seems unnecessarily challenging.