The Joint Committee (JC) of the ESAs today published the long-awaited response to the European Commission's Call for Advice (CfA) on securitisation prudential framework (see news article of 18 October 2021). In the CfA, the EU Commission asked for advice on improving the regulatory conditions for securitisation. The core of the CfA was the review of the capital requirements according to CRR and Solvency II as well as the eligibility criteria of securitisations under the LCR. In addition to their own analyses, the ESAs also took into account the opinions of the market. The core results of the CfA are presented below:
Core results of the Call for Advice on the securitisation prudential framework
- In essence, the JC concludes that the regulatory framework for securitisation is basically working well. The weak development of the securitisation market is attributed to a combination of various factors, including the current European monetary policy. Regulatory policy plays a subordinate role at best.
- Accordingly, the JC advises against fundamental changes to the capital requirements for securitisations. The JC makes such fundamental changes subject to the condition of further, in-depth investigations, also in coordination with the Basel Committee. Thus, no significant adjustment is to be expected in the short and medium term.
- The JC does, however, propose lowering the capital requirements for significant risk transfer transactions, especially synthetic securitisations. In contrast to other types of securitisations, the JC has identified a more important role of the prudential framework for this kind of transactions and would therefore like to promote the market by easing the capital requirements. The risk sensitivity shall be improved by lowering the risk weight floor for retained senior tranches (12% for non-STS tranches and 7% in the IRBA approach for STS tranches). It remains open whether a reduced output floor for SRT securitisations will still be relevant after the introduction of the general output floor under Basel III from 2025.
- The effect of a possible adjustment of the LCR is estimated to be too small, as the share of securitisations in the liquid assets of the LCR is only marginal. It is therefore recommended to leave the LCR requirements unchanged.
- The analysis of EIOPA and the feedback from the market lead the JC to conclude that the low interest of investors from the insurance sector is rather due to the complex product of securitisation than to overregulation in the Solvency II regulation. The JC therefore sees no need for improvement here.
Classification of the results
The ESAs' response to the Call for Advice on securitisation regulation remains unsurprisingly without a call for major adjustments. Despite the limited expectations, this result must be classified as a disappointment, as there are profound arguments for substantial changes in the regulatory framework. The biggest pain points were communicated only recently in a joint open letter from European industry associations to the EU Commission (see news article of 4 November 2022). With this outcome of the CfA, another opportunity to improve securitisation as a substantial financing instrument for the green transformation and crisis management is lost. On the contrary, from the current perspective, the lack of fundamental reform proposals will make the conditions for securitisation and thus the financing conditions for the real economy more difficult at the latest with the introduction of CRR III.