UK PRA publishes a paper on future capital calibrations
Following publication of HM Treasury’s near final statutory instrument and consultations by the PRA and FCA, all aiming to adapt the inherited EU Securitisation Regulation for a post-Brexit UK, the PRA has now issued a Discussion Paper on the Capital Requirements for Securitisation.
The paper focuses on the consequences for the capital requirements of securitisations of the Basel 3 output floor, the hierarchy of methods for determining these capital requirements and a possible STS for on-balance-sheet (synthetic) securitisations.
The initial suggestions of the PRA in all 3 areas deviate from the current trends in EU regulation and are not altogether cheerful: no halving of the p-factor for the purpose of the output floor calculation, a return to the Basel hierarchy of methods and no synthetic STS. However, the PRA did express strong support for a revisiting of the whole capital requirements calibration of securitisations, so some light at the end of the long tunnel might be discerned by optimists.
Responses are requested by 31 January with a consultation paper planned for the second half of 2024.
UK PRA launches public consultation on proposed reforms
UK PRA launches public consultation on proposed reforms
The UK Prudential Regulatory Authority (UK PRA) has taken a significant step forward by launching a public consultation on proposed changes to the retained EU Securitisation Regulation and the accompanying technical standards on risk retention and disclosure. The deadline for submissions is Monday 30 October 2023.
Rather than undertaking a complete overhaul, the UK PRA aims to introduce targeted adjustments to the existing EU securitisation framework with a target to implement the proposed changes by Q2'24.
At headline level, key changes include:
- Expanding its scope to one-off securitisation manufacturers
- More principle-based due diligence obligations for institutional investors
- More proportionate risk retention requirements for NPE exposures
- Updated approach towards re-securitisation permissions
- Tweaks to manufacturer disclosure requirements
While adhering closely to the current technical standards, the UK PRA suggests
- Targeted adjustments to risk retention provisions
- No changes to disclosure requirements
Finally, the UK PRA seeks insights from stakeholders on possibly recalibrating the definition of public and private securitisations and developing more risk-based disclosure requirements.
Bank of England and ECB respond to the EU Consultation on securitisation
The Bank of England and the ECB released a joint-response to the European Commission Consultation on securitisation. In their response they appear curiously to favour issuer self-certification of quality. This approach, which is not that of the PCS, is quite a bold one in the light of the events that precipitated the financial crisis. It remains to be seen whether it is one that commends itself to policy makers and investors who suffered the consequences of the sales by issuers of purportedly high quality securitisations that then suffered such dramatic losses.
Joint ECB and Bank of England report on securitisation is published
A few hours ago, the Bank of England and ECB released the recently announced report on securitisation entitled: "The case for a better functioning securitisation market in the European Union". PCS is reading the document and will be providing comments as soon as we have digested the contents. The report may be found here.
Senior IMF official supports the ECB/BoE approach to high quality securitisation
In the first sign that, following the ECB/Bank of England paper, the debate over the regulatory treatment of high quality securitisation is obtaining a foothold on the global agenda, Jose Viñals, a senior IMF official, spoke favourably of the approach championed in the joint communication. His comments were made in an interview with Borsen Zeitung and picked up by Reuters. (The Reuters piece may be found here and the original interview in German may be reached through here - but is behind a pay wall).
Joint ECB-Bank of England paper on securitisation is published
Today, the Bank of England and the ECB published the recently announced joint paper on securitisation. The paper supports strongly the value of high quality securitisation. Acknowledging the many macro-economic reasons for the low level of current European issuance, the paper also identifies the need to incorporate in the proposed regulatory schemes a single definition of high quality securitisations and to calibrate the prudential rules based on the actual performance of such securitisations. Reflecting arguments that PCS has been putting forward since its inception, we strongly welcome this short but focused and to the point contribution. What makes this paper all the more timely and important is that it addresses the global regulatory work being done by the Basel Committee and IOSCO. Until now, most of the contributions to the high quality securitisation debate had taken place within Europe and concentrated on European approaches (for example, Solvency II). This paper globalises the issue and puts this European approach squarely on the international regulatory agenda. The paper may be found here.
Following the European Commission, the Bank of England indicates its support for a revival of the securitisation market
Today, hot on the heels of the European Commission's very positive communication on securitisation, Dame Clara Furse of the Bank of England gave a speech where she stated that the Bank would "assess and, where necessary, act to promote a better functioning securitisation market in the United Kingdom". This adds further support for the new consensus which appears to have emerged amongst policy makers across Europe in favour of a strong return of a high quality securitisation market. The Bank of England link may be found here (with a link to the full speech) and the Reuters coverage here.
Strongest support yet from the Bank of England for a return of securitisation
In a front page article appearing in today's Financial Times, Andy Haldane from the Bank of England expressed strong support for securitisation. Both the statements and the tone are significant in that, following Mark Carney's support a few weeks ago, they move the Bank of England from a "neutral" position toward securitisation - recognising that it can be done well and safely - to a "positive" position - extolling the benefits that it can bring, when done well and safely. This is a thoughtful piece and a key moment in the rehabilitation of securitisation. The article may be found here.
Bank of England Financial Stability Report indicates support for securitisation
In its November Financial Stability Report, the Bank of England has expressed strong support for securitisation as a financing channel. It has expressed the desire to see a return of a securitisation market and has identified temporary reasons and possible structural reasons for the weakness of existing issuance. PCS strongly agrees with the identified temporary reasons - deleveraging, central bank liquidity, regulatory uncertainty and a lingering stigma against the product from some investors. PCS also notes the tentative identification of structural impediments to a return of the market: lack of standardisation of documents and structures, difficulties in modelling and the absence of ways to overcome high fixed costs for smaller issuers. We agree that these "may" be impediments but, in agreement with the Bank of England, do not believe the importance of these impediments is very clear. The comments on securitisation can be found on page 46 of the report that may be found here.
Mark Carney, Governor of the Bank of England sees the Bank engaged in efforts to rebuild securitisation
In a speech given in London at an event to celebrate the 125th anniversary of the Financial Times, Mark Carney, Governor of the Bank of England outlined what he saw as the tasks of the Bank in the coming years. "Accordingly, I will concentrate today on three core elements of the Bank of England’s new Financial Stability strategy: creating resilient global banks, building robust markets and conducting central banking for global markets. These initiatives support a fourth leg of our strategy: improving the supply of finance in the UK. You will hear more about supply-side initiatives, aimed for example at rebuilding securitisation and supporting SME lending, in coming months." These statements, when added to similar sentiments expressed by President Draghi at the European Central Bank, Commissioner Barnier at the European Commission and senior policy makers across Europe, indicate that the belief in the need for securitisation coupled with an understanding that robust high quality securitisation is achievable is now becoming the new consensus across Europe. The full speech may be found here.