On Friday, 24 July 2020, the European Commission took the next legislative step to complete the reform of the securitisation rules that began with the STS Regulation in force since January 2019.
It was only in June 2020 that the High Level Forum for the completion of the Capital Market Union presented its final report [link TSI Compact] and made a number of important recommendations for securitisation. Two of these recommendations have now been adopted by the Commission under the heading "Recovery" as part of the measures to support the financial and real economy due to the effects of the COVID-19 pandemic:
First, the STS criteria applicable to true sale securitisations are stringently applied to synthetic balance sheet securitisations. This type of securitisation, in which banks transfer a portion of the credit risks from their core business to non-bank investors, is particularly important in the current recession with potentially increasing credit defaults, and is therefore of great importance in the context of capital management of banks. The detailed report of the European Banking Authority EBA from May 2020 on synthetic securitisations has shown that synthetic securitisations do not show higher defaults compared to true sale securitisations. By limiting the capital relief for STS to the senior tranche, it is ensured that both types of securitisation are treated as equally as possible.
Secondly, it is appropriate to propose rules to ensure the securitisation of non-performing loans (NPL). This concerns the retention requirements for NPL securitisations, according to which the legally required retention of 5% is to be calculated on the discounted value of the pool of NPLs instead of on their nominal value, which can also be held by the servicer of the receivables. Capital requirements for banks will be capped at the conservative level of at least 100% risk weight.
These proposals now need to be discussed by the European Parliament and the European Council of Ministers and, in the case of amendments, will have to go through the trilogue process of reconciliation, so that the responsibility of the legislature must be appealed to in order to achieve a efficient adoption by the end of 2020.
Amendment STS Regulation