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Financing of the EU economy - Is the EU securitization proposal up to the challenges?
Securitisation – The way forward
By Heijdra Michel - Regulatory Strategy and Member of the Group Management Committee, Ministry of Finance, the Netherlands
On 2 December 2015 the European Council agreed on a negotiating stance on the framework for simple, transparent and standardized (STS) securitization. The goal of this framework is to provide a common set of rules for sound and prudent securitisation. The Council agreement is a first, important step for the establishment of the STS-framework in Europe. For the revitalization of the securitisation market, however, a swift continuation of the legislative procedure is paramount. Next, the European Supervisory Authorities will develop technical standards to provide a consistent rulebook for the application of the STS-framework.
The STS-framework provides a solid footing for the recovery of the market, but we need to build on this by expanding the rules for sound and prudent securitisation to other parts of the securitisation market. There are two further steps to take: the treatment in Solvency II and the Liquidity Coverage Ratio (LCR).
Although insurers currently play a limited role in the securitisation market, securitisation provides important risk and portfolio diversification options. What may hold insurers back from investing in securitisations is uncertainty over the implementation of the STS-framework for insurers. Also, holding securitisations can at present be unreasonably costly compared to holding the unsecuritized loans. When expanding the STS-framework to explicitly cover insurers through Solvency II, this uneven treatment should be re-evaluated.
In the LCR delegated act there is a strong imbalance in the treatment of securitisations (specifically RMBS) relative to covered bonds. This is not justified as both Basel and the EBA have found covered bonds often to be less liquid than RMBS. The imbalance has a strong impact on asset managers’ investment decisions and may lead to inefficient capital allocation.
Concluding: the STS-framework is an important first step. However, we are not yet in a situation where a sound and prudent securitisation market can wholly be established. We should therefore be taking additional steps to adopt the STS-goals for Solvency II and the LCR.