EBA outlines securitisation market proposals

500 Euro bank notes

Sell-side banks can expect to deal with tougher rules in Europe’s securitisation market, as the regulator announces a new push to reduce risk by putting the onus on the originator of bundled loans.

The European Banking Authority wants to improve on the provisions laid down in the Capital Requirements Regulation (CRR), and has made a series of recommendations to ensure increased transparency, legal certainty of compliance with the retention rules, as well as prevention of any potential regulatory arbitrage.

It found that there is broad compliance with securitisation risk retention, disclosure and due diligence requirements in most countries, but it wishes to introduce additional safeguards to support the current framework.

In particular, the EBA is to roll out a complementary ‘direct' approach, where the onus is on the original lender or originator, together with the existing ‘indirect' approach that places responsibility on the investor.

The EBA also wants to narrow the definition of originator under the CRR, as it believes currently that “securitisation transactions may be structured so as to meet the legal requirements of the regulation without, however, following the ‘spirit' of the regulation”.

Finally the EBA called for harmonisation of international rules in the securitisation market to ensure Europe’s financial industry remains competitive.

“The EBA believes that if the EU regime and the foreign legislation are not harmonised, it might drive a real wedge between the global securitisation markets and may further prevent EU issuers from benefitting from global investors base and reduce EU investors' ability to benefit from global securitisation investments,” the regulator said.

In October the European Commission went against some EBA proposals on securitisation market reform and eased rules on certain asset-backed loan bundles to improve liquidity. The triple package contained detailed rules to implement the Solvency II Directive, clarification of the leverage ratio and a requirement that banks should hold enough high quality liquid assets to cover the difference between the expected outflows and inflows over a 30-day stressed period.