AFME's Head of Fixed Income, Richard Hopkin, welcomes the EBA's long-awaited STS proposals.
On Friday 25 June 2015, at a public hearing, the EBA published its long-awaited response to its consultation earlier this year on “simple standard and transparent” (“SST”) securitisations.
There was much to welcome in the proposals, and AFME is encouraged that this is a big step forward.
First, on regulatory capital for bank investors, the EBA proposed a new and reduced calibration: halving the p parameter and a reduction in the floor to 10 percent for senior investment under IRBA and SA approaches. More detailed work is required fully to quantify the implications, and issues remain around how much the requirements continue to depart from capital neutrality, but these seem to be changes which go in the right direction.
Second, the announcement of proposals for a “qualifying” regime for certain types of asset backed commercial paper (“ABCP”) was also welcome – and a pleasant surprise as we did not expect a set of detailed proposals for ABCP quite so soon. This was unfortunately tempered by the limitation of the “qualifying ABCP” regime to assets with a maturity of less than one year, thereby ruling out auto loans – an important asset class in Europe – but we hope there will be scope for further discussion of this issue.
Lastly, the EBA also indicated that while synthetic securitisations remained out of scope it was open for further discussion on this. In previous submissions, AFME has repeatedly stressed that synthetics have an important role to play in supporting financial stability and increasing banks’ ability to fund the real economy. They do this by helping banks free up regulatory capital, particularly for assets such as SME loans. SME loans require large amounts of capital when held on bank balance sheets, and can be more challenging to securitise as cash transactions. The EBA rightly stated that more analysis was required here, and AFME looks forward to continuing to engage constructively on this topic.
The EBA plans to confirm last Friday’s announcement in a more detailed report to be issued in early July. Formally, this is a response to the Call for Advice by the European Commission in January 2014, at which level any further discussion will need to take place.
It is also important not to forget the global aspect. We await eagerly the conclusions of the Basel – IOSCO Task Force on Securitisation Markets, which undertook a similar consultation on “simple transparent and comparable” securitisation earlier this year and which we also expect to report shortly.
The European securitisation market urgently needs regulatory reform to recover. While encouraged by these positive developments and the continuing engagement provided by the authorities we urge swift action to turn these into real regulations on the ground. These should provide a balanced and prudent framework that will once again encourage issuance of and investment in qualifying securitisation to help fund the real economy, strengthen Europe’s financial system and provide an important pillar to support capital markets union.