Changes in Securitisation Regulation in response to the COVID-19 crisis
03/04/2021 - Reading time: 4 minutes
Attorney at Law
The Securitization Regulation aims in particular to diversify the sources of financing for European companies and to put the allocation of risk in the European financial system on a broader basis. The relief on banks' balance sheets resulting from increased securitization activity should also enable an expansion of lending to the real economy.
Although it is not yet clear when and to what extent, the current Covid 19 crisis is expected to cause non-performing loans (NPLs) to increasingly reappear on bank balance sheets in the European Union, leading to defaults. Depending on how quickly the EU economy recovers from the Covid 19 crisis, the quality of bank assets - and thus the lending capacity of banks - could decrease. For this reason, sales of non-performing loans on the capital mar-ket are very likely to become significantly more important.
On 24 July 2020, the European Commission adopted a package of capital market measures that forms part of a comprehensive economic recovery strategy in the face of the Covid 19 crisis. The European Commission wants to strengthen the capital markets in order to overcome the Covid 19 crisis as quickly as possible. Increased investments should support the recapitalization of companies. Banks should be enabled to finance the recovery of the economy by continuing to provide credit to the economy, thereby making a significant contribution to mitigating the consequences of the Covid 19 crisis.
The European Commission's action plan for the economic recovery of the capital markets includes various amendments to the Prospectus Regulation, the MiFID II Directive and the Capital Requirements Regulation, as well as various changes to the rules on securitization.
In June 2020, the High Level Forum on the completion of the Capital Markets Union presented its final report and made a number of recommendations for securitization. The EU Commission has adopted two of these recommendations 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.
The EU Commission closes regulatory gaps with its legislative proposals
First, the STS criteria (simple, transparent and standardized, STS), which have so far only applied to true sale securitizations, are consistently applied to synthetic securitizations. This type of securitization, in which banks transfer part of the credit default risks from their core business to non-bank investors, is of particular importance for the capital management of banks in the current recession with potentially increasing credit defaults. The detailed report of the European Banking Authority (EBA) of May 2020 on synthetic securitizations showed that these are not subject to higher credit defaults compared to true sale securitizations. The EU Commission's legislative proposal therefore closes a regulatory gap in the current EU Securitization Regulation. By limiting the capital relief for STS to the sen-ior tranche, it is ensured that both types of securitization are treated equally as far as pos-sible.
Regulation on the securitization of NPLs
Second, regulations are usefully proposed to ensure the securitization of non-performing loans (NPLs). This concerns the retention requirements for NPL securitizations, according to which the legally required retention of 5% is to be calculated on the discounted value of the pool of NPLs instead of their nominal value and this can also be held by the servicer of the receivables. The capital requirements for banks will be capped at the conservative value of at least 100% downside risk weight.
These proposals will subsequently have to be dealt with by the European Parliament and the European Council of Ministers. The EU Commission is pressing for rapid implementation.
Attorney at Law