12 December 2022
- Reviewing the European securitisation framework offers an opportunity to improve the efficiency and risk sensitiveness of the securitisation prudential framework.
- The ESAs are therefore proposing targeted amendments to the capital framework for banks.
- In the ESAs’ view, however, changing the securitisation prudential framework would not be a solution that in itself would ensure the revival of the securitisation market.
The three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) today published a joint advice in response to the European Commission’s October 2021 call for advice on the review of the securitisation prudential framework. The ESAs welcome the current review as an opportunity to assess the performance of the current framework and support the objective of reviving the EU securitisation market. The targeted proposals in the advice aim at improving the consistency and risk sensitivity of the capital framework for banks whereas the liquidity framework for banks and the prudential framework for (re)insurers should be maintained as it currently stands. However, the ESAs believe that re-calibrating the securitisation prudential framework would not be a solution that in itself would ensure the revival of the securitisation market.
The advice consists of two parts: the assessment of the recent performance and appropriateness of the rules on capital and liquidity requirements for banks and the review of the securitisation capital framework applicable to (re)insurers.
Advice on the banking sector
The ESAs make the following recommendations with respect to banks’ capital framework:
- some technical quick fixes aimed at improving the framework’s consistency and clarity;
- a more substantial, but still targeted, recommendation which recognises the reduced model and agency risk associated with the securitisation originators by reducing the risk weight floor for senior tranches retained by originators under a set of appropriate safeguards. In particular, the recommendation focuses on why this may support further growth in the significant risk transfer market in a prudent manner, by promoting the issuance of resilient securitisations without jeopardising financial stability;
- general issues on the securitisation risk weight formulas that underpin the framework are raised where further work is needed to reach conclusions.
As regards the liquidity framework for banks, the ESAs consider that the current framework should be kept as it currently stands. According to supervisory data, credit institutions do not rely on securitisations to face liquidity stress periods. Moreover, there is no new evidence in terms of the performance under a liquidity coverage ratio (LCR) stressed scenario, including the period covering the COVID-19 pandemic, to justify any prudent recalibration of the LCR.
Advice on the insurance sector
The introduction of the framework for simple, transparent and standardized securitization in 2019 had no major impact on (re)insurers’ investment decisions. Based on the input received and the analysis performed, the ESAs’ advice concludes that the Solvency II framework does not seem to influence insurance activity in EU securitisation. Moreover, there is not sufficient evidence to conclude that the current capital requirements for spread risk on securitisation positions in Solvency II are not fit for purpose.
On the coherence of the existing calibration methods with the overall Solvency II framework and with the securitisation framework of the Capital Requirements Regulation (CRR) for banks, the ESAs conclude that, although some changes could be feasible, their potential effectiveness in reviving the securitisation market remains uncertain and would come at the cost of increased complexity. Considering all the above, the ESAs do not advise changes to the current framework of Solvency II with regards to the prudential treatment of securitisation.
The ESAs stress that further analytical work should be conducted to gain a holistic understanding of the relevant factors driving the securitisation market, some of which lie outside the scope of the prudential framework, including the recent monetary policy environment and the role of the due diligence and transparency requirements.
For that purpose, it is recommended that the ESAs conduct further monitoring work on additional data as it becomes available.
In addition, ESMA has started the revision process of the disclosure templates for securitisation transactions and will assess, as a part of this, whether greater proportionality can be introduced into the templates.
Background and legal basis
As part of the capital markets union action plan, the EU Commission is currently engaged in a process of reviewing the EU securitisation framework and, in that context, has addressed a call for advice to the Joint Committee of the ESAs in October 2021. The call seeks advice on the performance of the rules on capital requirements for banks and (re)insurers and liquidity requirements for banks relative to the framework’s original objective of contributing to the revival of the EU securitisation market on a prudent basis.
Joint Committee advice on the review of the securitisation prudential framework (executive summary)
Joint Committee Advice on the review of the securitisation prudential framework (banking)
Joint Committee Advice on the review of the securitisation prudential framework (insurance)