Qualifying Securitization: EBA presses pause?

The EC has been pressing fast forward on Capital Markets Union

In recent speeches the European Commission has been fast tracking work on simple and transparent securitisation (QS), and will be publishing an action plan in September. These changes may be implemented ahead of the Basel Securitisation timetable, i.e. before 2018. Over time the concept of Capital Markets Union has the capacity to significantly change the shape of banking in Europe, so this is an important area to watch.

Nevertheless the EBA technical advice doesn’t seem to change the game

The EC asked the EBA to advise on criteria for identifying simple and transparent securitisations, and their regulatory treatment. The EBA presented its advice last week. This includes recalibration of the BIS Securitisation framework for ‘qualifying’ securitisation positions, but does not address some concerns raised by market participants. Some of the changes may still be counterproductive – the EBA’s recalibration for QS is tougher than the existing framework for some assets (e.g. Southern European SMEs), even if softer than the BIS proposals, with accelerated implementation.

The impact analysis suggests problems with the external ratings based approach

A large amount of assets will be subject to this approach, and the impact analysis still shows a big increase in capital requirements, and a big range in outcomes (c.50% have 3x the basic pool RWA requirements). This could mean that better quality assets get a benefit, with weaker assets finding it tougher – the better assets already have functioning markets.

Points to a gradual rather than a step change in securitization markets in Europe

The EC doesn’t have to follow the EBA’s advice, but it would be surprising if it was completely ignored. As such this does not suggest that a new asset class is being created that will dramatically change market structure in the next few years (e.g. a new class of security for the ECB to buy in size as part of QE), but we will be watching this space carefully.