Revised securitisation rules to support recovery
What's new?
The new regulation provides synthetic balance sheet securitisations access to the status of simple, transparent and standardised (STS), which was previously only available for true sale securitisations. This regulation will allow leasing companies with the status of credit institutions to reduce prudential capital requirements, enabling our industry to grant more leases to businesses and households. Additionally, the approval of a prudential regulatory capital discount for non-performing loan (NPL) securitisations gives the right incentive to support leasing companies in freeing-up their balance sheets from non-performing exposures, which can be expected to grow as a result of the current COVID-19 crisis. These synthetic STS and improved NPL securitisation rules have already come into force.
New STS label for high quality synthetic balance sheet securitisations
In the current context, it is vital that risks are moved away from the systemically important parts of the financial system and that lenders strengthen their capital positions. Synthetic securitisation is one way of achieving this, as well as, for example, raising new own funds. For this reason, the European Commission has created an STS framework (inspired by that used for true sale securitisations) for balance sheet synthetic securitisations.
The new STS framework for balance sheet synthetic securitisations is inspired by the STS framework of true sale securitisations, however, there are certain requirements for STS traditional securitisations that are not appropriate for STS on-balance-sheet securitisations due to inherent differences between both types of securitisation, in particular due to the fact that, in synthetic securitisations, the risk transfer is achieved via a credit protection agreement instead of a sale of the underlying assets.
Therefore, the STS criteria for synthetic securitisations is adapted in order to take those differences into account. Furthermore, the new regulation introduces a set of new requirements, specific to synthetic securitisations, to ensure that the STS framework targets only on-balance-sheet synthetic securitisations and that the credit protection agreement is structured to adequately protect the position of both the originator and the investor. That new set of requirements should seek to address counterparty credit risk for both the originator and the investor.
This regulation will allow leasing companies to reduce capital requirements, enabling our industry to grant more leases to businesses and households. The new regulation also integrates sustainability into the securitisation framework. Technical Standards will be developed to report on the sustainability of securitisation products and the European Banking Authority will draft a proposal for a dedicated framework for sustainable securitisation.
These synthetic STS rules have already come into force. The rules on the treatment of synthetic excess spread will not come into force until April 2022, as regulatory technical standards (RTS) still have to be developed by the EBA for this purpose.
What is synthetic securitisation?
Synthetic securitisations involve transferring the credit risk of a set of loans or leases to large corporates or to small and medium-sized enterprises (SMEs), by means of a credit protection agreement where the originator buys credit protection from the investor. Such credit protection is achieved by the use of financial guarantees or credit derivatives while the ownership of the assets remains with the originator and is not transferred to a securitisation special purpose entities (SSPE), as is the case in traditional securitisations.
The originator, as protection buyer, commits to pay a credit protection premium, which generates the return for investors. In turn, the investor, as protection seller, commits to a specified credit protection payment when a pre-determined credit event occurs.
In addition, originators, sponsors, and original lenders that are involved in a securitisation deal should be aligned. For this reason, as a minimum, the originator, sponsor or original lender should retain, on an ongoing basis, a material net economic interest in the securitisation of not less than 5%.
Prudential treatment of NPL securitisations
The Covid-19 pandemic, and various other risks increasing the number of non-performing exposures (NPEs) or non-performing loans (NPLs), increase the need for institutions to manage and deal with their NPEs. One way for institutions to do so is to trade their NPEs on the market through securitisation. The European Commission has proposed a preferential prudential regulatory capital for NPL securitisations, which is in line with Leaseupe’s set of requests to improve leasing companies’ access to finance. This amendment will help leasing companies to free-up their balance sheets from non-performing exposures, which are expected to grow because of the current economic crisis. This new preferential prudential treatment for NPL securitisations has been approved and is already in force for institutions to use.