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.
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 Joint Committee of the ESAs’ report on securitisation is published
Today, the Joint Committee of the European Supervisory Authorities (EBA, ESMA and EIOPA) issued their long-awaited report on the regulation of European securitisation. This report was mandated in the 2017 Securitisation Regulation and was supposed to provide a “tour d’horizon” of how the regulation was functioning and whether it was achieving its stated objective of reviving a safe and sound securitisation market.
An initial review of the report would suggest that it appears to be a significant missed opportunity to address the shortcomings of the current regulatory framework and consequent failure to revive the market, and that it has not drawn the firm conclusions needed. Retreating behind the narrow mandate provided by the regulation, the ESAs have chosen not to address the recommendations of the independent High Level Forum on the Capital Markets Union set up by the Commission and endorsed by almost all market participants (including PCS) and have instead opted to call for yet more investigations of the key recommended prudential changes.
PCS hopes to bring a more thorough analysis of this report in a forthcoming Newsletter, but it is unlikely that its conclusions will change our view that this report is a major disappointment.
Regulatory wobbles in the introduction of the new securitisation regime
On Friday, the Joint Committee of the ESAs, representing the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) released a ‘statement clarifying securitisation disclosure requirements and consolidated application of securitisation rules for credit institutions’. This statement represents the latest step by European institutions to deal with two substantial problems with the introduction of the new securitisation regime.
Both issues are highly technical but very serious for a number of market participants.
The first issue relates to the disclosure requirements for all European securitisations. The extent of the disclosure was meant to be set out in a regulatory technical standard drafted by ESMA. A few months ago, ESMA caused dismay in the markets when it released the final draft of a technical standard that deviated substantially from the proposal put forward for consultation. Amongst other things, this final draft contained a requirement for private transactions (including ABCP conduits) to provide the same disclosure as required of public deals. This novel and, in PCS’ view, unwarranted requirement would have been near impossible to meet by January 1st, when the rules would have come into force. This in turn would, in all likelihood, have led to the closure of all European asset-backed conduits by the year-end. (There were other technical issues too with the final draft standard). Bearing in mind the dire consequences of applying this technical standard, it would appear that the Commission has postponed its implementation pending possible review. However, in the absence of such technical standard the STS Regulation provides that originators will need, as of January 1st, to disclose according to a older standard, set out in the Credit Rating Agency (CRA) Regulation. For complex technical reasons, a number of market participants will also find this near impossible to comply with.
The second issue involves a drafting mistake in the Capital Requirements Regulation. This admitted mistake would require non-European subsidiaries of European banks involved in non-European securitisations to comply fully with the European securitisation requirements in respect of these securitisation – even though they took place entirely offshore and were never sold to any European investors. This is not only unnecessary but, in some cases, is probably impossible as it might require the non–European subsidiaries to violate the laws of local host jurisdictions.
The Joint Committee’s statement issued last Friday is basically an invitation to national competent authorities that regulate securitisation originators not to enforce the law. It is somewhat similar to the “no-action letters” those used to the United States’ capital markets know well. However, there are a number of key differences.
First, as the statement acknowledges, the Joint Committee has no power (in contradistinction from, e.g the US SEC) to issue binding commitments not to enforce legal provisions. Secondly, neither the Joint Committee nor its component elements (EBA, EIOPA and ESMA) are regulators. So the statement does not commit those regulatory authorities that will actually have to enforce those rules (such as the AMF and ACPR in France or the BAFIN in Germany). Finally, the statement does not suggest a blanket non-enforcement but a case by case analysis based on risk.
Whether this statement will be enough to allow those originators who would otherwise have struggled to meet the requirements to issue in the new year will turn, it would appear, on the answers to two questions. First, will banks be willing technically to break the law on the strength of a non-binding promise? In part, the answer may depend on whether individual national regulators are prepared publicly to endorse the statement of the Joint Committee. Secondly, since the statement invites a case by case analysis, will national competent authorities be prepared to engage before issuance with originators to provide a reasonable level of comfort?
Although PCS remains optimistic about the new STS regime, such regulatory wobbles are inauspicious. We fear that this may not be the last of such wobbles and we strongly urge European authorities reflect deeply on the wisdom of any further shocks to the securitisation market.
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