Full consultation response available here.
Risk Control thanks the European Commission for the opportunity to address the issues raised in the Consultation Document on an EU framework for simple, transparent and standardised securitisation published on 18th February 2015 (the “Consultation”).
Securitisation provides an important source of funding for bank and non-bank lenders. This is particularly significant in Europe where banks, because of the wider economic environment, face significant challenges in meeting scheduled Basel III increases in regulatory capital and liquidity ratios.
As the EU consultation notes, securitisation activity in Europe remains depressed. This is in contrast to the current experience in the US where securitisation new issue volumes have recovered. Identifying and, if possible, rectifying impediments to the revival of European securitisation is an important policy objective, in the view of many.
We believe that the defining by regulators of a category of High Quality Securitisation (HQS) transactions could contribute to the revival of securitisation activity in Europe, but only if the definition selected by the authorities serves as the basis for differential regulatory rules on capital and liquidity.
The Basel proposals for securitisation capital rules published in the December 2014 paper BCBS 303 are designed to cover a very broad set of securitisations. These range from simple, transparent securitisations of well-understood assets originated by tightly regulated banks, on the one hand, to opaque transactions with pool assets originated by unregulated entities and about which little information is available.
The bulk of the European market consists of securitisation of prime mortgages, SME loans, auto loans and card receivables originated by regulated banks (or well-established manufacturers in the case of auto loans). The banks involved typically organise their securitisations in a vertically integrated way with an important objective being that of raising funds for stable loan businesses. This market proved very robust in the face of a GDP stress that matched or exceeded in magnitude the stress experienced in the US.
To facilitate differentiation between the wide variety of securitisations, it is entirely reasonable and desirable that the authorities devise an HQS definition and employ it as the basis for preferential capital and liquidity rules of the simpler, more transparent and better understood part of the market. In our responses below to the questions raised by the consultation, we explain how such differentiation should be accomplished.
Perraudin (2014) provides strong empirical justification for making such distinctions in capital rules as it shows that, holding the rating constant, a key risk measure, namely return volatility, is substantially lower for European securitisation tranches that may be regarded as HQS compared to others.
We focus in our comments on the questions on alternatives to credit ratings (Question 7) and the appropriate capital treatment of HQS (covered by Questions 9, 10, and 11). These are areas in which we have particular experience and expertise and have completed recent research papers and analysis.