How to Revive the European Securitisation Market: a Proposal for a European SSFA

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Two page executive summary here.

Georges Duponcheele, Alexandre Linden, William Perraudin

European policy-makers view the revival of the securitisation market as a key step in (i) restoring orderly funding to European banks and (ii) boosting lending necessary for growth. Current and proposed regulatory capital rules are, however, major impediments to reviving the securitisation market. Since the crisis, changes in ratings agencies methodologies have boosted the conservatism of ratings based capital requirements rules applied to European banks. The Ratings Based Approach (RBA) contained in the current Basel II agreement and implemented in Europe via the Capital Requirements Regulation is now profoundly discouraging to new issuances of High Quality Securitisations (HQS).

The Basel Committee’s Ratings and Securitisation Workstream (RSW) has proposed a new set of capital rules (see BCBS (2013c)) under which US banks would employ simple capital formulae while European banks would de facto employ an approach based on agency ratings. The latter approach, the External Ratings Based Approach (ERBA), would boost the level of conservatism in capital requirements beyond that implied by the RBA.

In this paper, we present a quantitative impact study of the different approaches employed in the current rules and proposed by regulators and the industry. Using a sample of 1,771 actual European securitisation tranches, we show how the approaches compare and benchmark them against a closed-form, analytic capital model developed by Duponcheele et al. (2014c), namely the Conservative Monotone Approach (CMA). We concisely describe current and proposed approaches to calculating regulatory capital for securitisations, comment on whether they are excessively conservative and explain the inconsistency implied by the Basel Committee’s latest proposed hierarchy.

We propose a simple solution to the regulatory capital roadblock, which is preventing a revival of the European securitisation market. Our proposed solution is that the European authorities immediately adopt, in the case of HQS, a slightly adjusted version of the Simplified Supervisory Formula Approach (SSFA) in the current Basel proposals. Banks in Europe should be permitted to apply this “European SSFA” instead of the current RBA for HQS.