Securitisation Purchases by the ECB – What is “Senior Enough”?

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The ECB will soon adopt a set of eligibility criteria for its planned ABS purchase programme. These criteria are likely to include a restriction based on agency ratings. The inclusion of dependence on agency ratings in yet another area of official or regulatory policy is regrettable and is inconsistent with the frequently expressed intention of European policy-makers.

In another paper, we have documented the very unfortunate effects of rating agency actions on the European securitisation market, including the use of sovereign ratings caps, counter-party risk criteria and methodology changes adopted and then subsequently reversed.

The ECB could signal to the market its desire to reduce reliance on ratings by adopting a formula-based criterion on seniority. This note sets out a simple way in which the attachment point of a securitisation tranche may be assessed and deemed “Senior Enough” or “Not”. This criterion could be employed in conjunction with a rating-based criterion during a “bedding-in” period if desired, the latter to be dropped if it were subsequently found to be redundant.