The COVID-19 crisis is severely affecting people, companies, health systems and Member State economies. In its Communication of 27 May 2020 entitled ‘Europe’s moment: Repair and Prepare for the Next Generation’, the Commission stressed that liquidity and access to finance would continue to be a challenge in the months to come. It is therefore crucial to support the recovery from the severe economic shock caused by the COVID-19 pandemic by introducing targeted amendments to existing pieces of financial legislation.
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Credit institutions and investment firms (institutions) will have a key role in contributing to the recovery. At the same time, they are likely to be affected by the deteriorating economic situation. Competent authorities have provided temporary capital, liquidity and operational relief to institutions to ensure that they can continue to fulfil their role in funding the real economy in a more challenging environment. For the same purpose, the European Parliament and the Council have already adopted certain targeted adjustments to Regulations (EU) No 575/2013 (4) and (EU) 2019/876 (5) of the European Parliament and of the Council in response to the COVID-19 crisis.
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Securitisation is an important element of well-functioning financial markets since it contributes to diversifying the funding sources of institutions and releasing regulatory capital that can be reallocated to support further lending. Furthermore, securitisation provides institutions and other market participants with additional investment opportunities, thereby allowing portfolio diversification and facilitating the flow of funding to businesses and individuals both within Member States and on a cross-border basis throughout the Union.
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It is important to reinforce the capacity of institutions to provide the necessary flow of funding to the real economy in the aftermath of the COVID-19 pandemic, while ensuring that adequate prudential safeguards are in place to preserve financial stability. Targeted changes to Regulation (EU) No 575/2013 as regards the securitisation framework would contribute to the achievement of those objectives and enhance the coherence and complementarity of that framework with the various measures taken at Union and national level to address the COVID-19 crisis.
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The final elements of the Basel III framework published on 7 December 2017 impose, in case of securitisation exposures, a minimum credit rating requirement upon a limited set of protection providers only, namely entities that are not sovereign entities, public sector entities, institutions or other prudentially regulated financial institutions. It is therefore necessary to amend Article 249(3) of Regulation (EU) No 575/2013 to align it with the Basel III framework in order to enhance the effectiveness of national public guarantee schemes that support institutions’ strategies to securitise non-performing exposures (NPEs) in the aftermath of the COVID-19 pandemic.
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The current Union prudential framework for securitisation is designed on the basis of the most common features of typical securitisation transactions, namely performing loans. In its Opinion on the Regulatory Treatment of Non-Performing Exposure Securitisations (6) (the ‘EBA Opinion’), the European Banking Authority (EBA) pointed out that the current prudential framework for securitisation set out in Regulation (EU) No 575/2013 leads to disproportionate capital requirements when applied to securitisations of NPEs because the Securitisation Internal Ratings Based Approach (SEC-IRBA) and the Securitisation Standardised Approach (SEC-SA) are not consistent with the specific risk drivers of NPEs. A specific treatment for the securitisation of NPEs should therefore be introduced, building upon the EBA Opinion as well as internationally agreed standards.
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Since the market for NPEs is very likely to grow and change quite substantially as a result of the COVID-19 crisis, the NPE securitisation market should be closely monitored and the prudential framework for NPE securitisation should be reassessed in the future in the light of a potentially larger pool of data.
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In its ‘Report on STS framework for synthetic securitisation’ of 6 May 2020, EBA recommended that a specific framework be introduced for simple, transparent and standardised (STS) on-balance sheet securitisations. Given the lower agency risk and modelling risk of an STS on-balance sheet securitisation compared with a non-STS synthetic securitisation, an appropriate risk-sensitive calibration of own funds requirements for STS on-balance sheet securitisations, as considered in that report, should be introduced, taking into account the current preferential regulatory treatment of senior tranches of SME portfolios. EBA should be mandated to monitor the functioning of the STS on-balance sheet securitisation market. Greater recourse to the STS on-balance sheet securitisation promoted by a more risk sensitive treatment of the senior tranche of such securitisations would free up regulatory capital and could ultimately further expand the capacity of institutions to lend in a prudentially sound manner.
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Grandfathering should be introduced for outstanding senior positions in synthetic securitisations that met the conditions for the preferential prudential treatment that applied before the date of entry into force of this amending Regulation.
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In the context of the economic recovery from the COVID-19 crisis, it is essential that end-users can effectively hedge their risks so as to protect the robustness of their balance sheets. The Final report of the High Level Forum on the Capital Markets Union noted that an overly conservative Standardised Approach for Counterparty Credit Risk (SA-CCR) might have a detrimental impact on the availability and cost of financial hedges to end-users. In that regard, the Commission should review the calibration of the SA-CCR by 30 June 2021 while taking due account of the specificities of the European banking sector and economy, the international level playing field and any developments in international standards and fora.
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Synthetic excess spread (SES) is a mechanism commonly used in the securitisation of certain asset classes for originators and investors to reduce the cost of protection and the exposure at risk, respectively. A dedicated prudential treatment of SES should be set out to prevent SES from being used for regulatory arbitrage purposes. In that context, regulatory arbitrage occurs when an originator institution provides credit enhancement to the securitisation positions held by protection providers by contractually designating certain amounts to cover losses of the securitised exposures during the life of the transaction, and such amounts, which encumber the originator institution’s income statement in a manner similar to an unfunded guarantee, are not risk-weighted.
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EBA should be mandated to develop draft regulatory technical standards to ensure a harmonised determination of the exposure value of SES. Those regulatory technical standards should be in place before the new prudential treatment becomes applicable. In order to avoid disruptions to the synthetic securitisations market, institutions should be given sufficient time to apply the new prudential treatment of SES.
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As part of its report on the functioning of the prudential framework for securitisations the Commission should also review the new prudential treatment of SES in light of developments at international level.
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Since the objectives of this Regulation, namely to maximise the capacity of institutions to lend and to absorb losses related to the COVID-19 crisis, while still ensuring their continued resilience, cannot be sufficiently achieved by the Member States but can rather, by reason of their scale and effects, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality, as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve those objectives.
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Regulation (EU) No 575/2013 should therefore be amended accordingly.
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In view of the need to introduce targeted measures to support economic recovery from the COVID-19 crisis as quickly as possible, this Regulation should enter into force as a matter of urgency on the third day following that of its publication in the Official Journal of the European Union,
