Speakers of the session
Regulatory Strategy and Member of the Group Management Committee, Ministry of Finance, the Netherlands
Director for Regulation and Prudential Supervision of Financial Institutions, DG for Financial Stability, Financial Services and Capital Markets Union, European Commission
MEP, Committee on Economic and Monetary Affairs, European Parliament
Director General, Financial Market Section, Ministry of Finance, Slovak Republic
Pablo Zalba Bidegain
MEP and Vice-Chair, Committee on Economic and Monetary Affairs, European Parliament
PhD, CFA, Head of International Structured Finance and Covered Bond Research, Bank of America Merrill Lynch Global Research
Managing Director, EMEA Structured Finance, Moody’s Investors Service
Head Group Governmental Affairs, UBS AG
Deputy General Manager, CNP Assurances
Objectives of the sessionThe session will first try to clarify the ambitions and the expected contributions of the EU securitisation framework in the EU Capital Market Union context. The session will then try to outline how to make effective progress toward an efficient and consistent EU securitisation framework. In particular the session will address the risk specificities of securitisation techniques as it is a prerequisite to achieve a balanced calibration of the framework, in particular in the global context.
Points of discussion
What are the objectives and challenges of the EU securitisation framework?
How is securitisation expected to contribute to CMU, taking into account the anticipated regulatory costs of securitisation? What should be the ambition of an EU securitisation market given the increasing need of regulatory capital of banks?
What would be an appropriate timeframe for an effective relaunch of the EU securitisation market? Has the EU securitisation market already gone past the point of no return?
- Are regulatory constraints on insurers, hedge funds or UCITS preventing an effective recovery of EU securitisation markets or are other factors more relevant in that regard? Is the current very low cost of funding for banks making securitisations less attractive for banks? How should be done to put securitisation on an equal footing with other funding mechanisms such as covered bonds?
How to progress toward an effective, consistent and proportionate EU securitisation framework and appropriately address risks specific to securitisation?
- What do the financial industry like about the Council text on securitisation and what it would see differently? Does the proposed framework deliver a proportionate approach on due diligence and certification duties having regard to the objective of restoring confidence in securitisation? What other possible issues need to be addressed on both originator and investor sides, for the EU framework to make a sufficient contribution to the EU securitisation market?
- What aspects of the proposed EU securitisation framework are of particular interest or concern for insurers as investors in this product? What are the specificities of insurers that a regulatory framework should take into account?
- What are the specific risk features of securitisation, which would justify the non-neutrality of securitisation capital charges? How could these risks be managed notably from a regulatory perspective without adding excessive costs? Should the EU use the US market as a basis for the prudential treatment of securitisation?
Challenges posed by the definition of a EU regulatory securitisation framework in the global context
- What is the agenda regarding securitisation at an international level? What is the potential outcome of the on-going discussions in Basel and how could these impact on the European markets?
- What are the potential obstacles faced by non-Europeans investing in European securitisations or European firms investing in non-European securitisations?
Background of the sessionThe top priority of the EU regulatory agenda is promoting economic growth and job creation. With the securitisation package, the EU institutions intend to help these very important refinancing markets recover hopefully without ever jeopardising financial stability. To attract a more diversified and stable investor base, the proposed framework for banks will be followed by a review of the framework for insurance companies. This is a matter of great urgency.
Delivering a framework which combines robust structural features (the STS pillar) and proportionate capital charges (CRR and Solvency II pillars) is critical. Underestimating risk might encourage inappropriate risk taking practices, which were at the root of the subprime crisis. Conversely over-estimating risk through unduly high capital charges and making risk management burdensome, would deter investors from entering the market and make EU financing even more costly and scanty.
In this respect, some stress that the proposed framework is featuring additional or different risk considerations e.g. securities such as “cocos” shoulder an explicit tranching charge, which is different from the one proposed for securitisation. Something unusual also is the proposed risk approach encompassing both unexpected as well as expected losses. The framework insufficiently factors in the benefits brought by collateral. Etc.
More importantly, although securitisation does not change the credit risk of the underlying assets but only redistributes it across tranches with different seniority, investors question what they view as excessive “non neutrality” of the framework. This means that the prudential cost required to invest in the entire waterfall of tranches is typically higher than the regulatory cost of direct bank lending. This is the case even for STS securitisations, although STS criteria are intended to address critical risk issues such as information asymmetries, principal/agent misalignment, adverse selection risk, etc.
As far as the STS concept is concerned, the proposed framework faces the challenge of striking the right balance between proportionate due diligence and certification duties and the need to protect financial stability. There the proposed liabilities for both issuers and investors, as well as related sanctions, are considered to be diproportinate. Furthermore, specific to the EU proposed framework, the use of proxy-data by third party investors which will be subject to additional requirements to be set by the EBA in level 2 legislation, is expected to largely cancel the possibility for investors to resort to Internal Risk Based (IRB) approaches.
Finally, the modest objective of the Commission, which is to add €100 Billion to the existing €90 Billion/year EU issuance level – i.e. # 0,4% of the assets of the 130 Banks supervised by the SSM, and # 0,8% of EU non financial corporates debt - may well be at risk due to the concerns highlighted above.
This is mainly an EU issue. Indeed, in the US a large part of securitisations – residential mortgage-based ones (MBS) - are originated and directly passed to the GSEs, which need not to comply with Basel requirements. Moreover, in the US, originating banks are not subject to a retention rule for MBS, the possibility exists to use issuer’s data to model risk, and insurance companies can assimilate securitisation risk to a corporate bond one.