* EC pushes back deadline to determine liquidity buffer
* High quality ABS may have case for inclusion in LCR
* EBA set to streamline criteria to define High-Quality
By Anna Brunetti
LONDON, June 20 (IFR) - The European Commission is
postponing a decision on new bank liquidity rules that could
give Europe's securitisation sector a badly needed shot in the
arm, but could open up a debate on how far regulators can go to
revive the market.
As legislators struggle with the task of defining the
Liquidity Coverage Ratio (LCR), the deadline set under the
capital requirements directive (CRD IV) has been pushed back to
This extension would allow the Commission to take into
consideration the definition of High Quality Securitisation
(HQS) that the European Banking Authority, tasked by the
Commission itself earlier this year, is readying for the end of
September. This, in turn, could enable better LCR treatment of
these high-quality assets.
"If safe and transparent products are identified, then the
Commission is keen on considering this in the prudential
treatment of securitisation," said Chantal Hughes, spokeswoman
for Commissioner Michel Barnier.
Officials sources inside national finance ministries and
elsewhere told IFR that there was progress on widening out the
terms of an LCR draft circulated in May.
This draft already eased rules set out under Basel III,
allowing a wider range of ABS - beyond RMBS - to be accepted as
a second-tier liquidity buffer, but it still applied a 25%
Members of the securitisation industry - who would like to
see lower capital charges, more ABS securities included in the
liquidity buffer and at a lower haircut - say those parameters
are still too narrow, especially with the notion of a
high-quality class of ABS being introduced by European
legislators and central banks.
The Bank of England and the European Central Bank have
recently published their proposal for "qualifying" ABS that
could be treated more favourably, and repeatedly called for the
rehabilitation of the structured finance market, which fell into
disfavour in the wake of the global meltdown.
With securitisation increasingly seen as a useful way to
boost the European economy - by increasing the supply of loans
available to cash-starved companies - there are signs that the
pleas for change are being heard.
And yet softening LCR rules would substantially deviate from
what was set out by the Basel Committee, and what the EBA
outlined in December last year as input for the Commission's
work on those rules.
There is an ongoing debate on what should be the catalyst
for changing the backdrop for securitisation: policymakers or
the market itself.
Some critics argue that prudential rules should not be
targeted at reviving a certain market, nor favour or penalise
particular asset classes.
BOOST FROM EBA's HQS?
Meanwhile, the EBA report on HQS could enable this product
tier to be granted better regulatory treatment.
Adam Farkas, executive director at the EBA, said one of the
key challenges in the definition of HQS was to strike a balance
between being too prescriptive and too generalist. HQS should be
more than high-level principles but less than a fixed set of
Setting up only high-level principles, as various parties
have proposed, may create a risk of arbitrage.
Farkas said the future set of criteria should steer clear
from a full reliance on credit ratings, but that some role may
still be included.
The EBA is focusing on three main elements to determine HQS:
the collateral pool of the product, its structure, and its
"Simplicity is key," Farkas said "We are looking to
harmonise transparency requirements so that investors understand
what they're buying," he added.
The EBA is looking at the industry-led quality label
criteria, the PCS (Prime Collateralised Securities), and at the
ECB collateral eligibility criteria as valid input for the
definition of HQS, he said.
The definition will also build on the work of the other two
European prudential authorities - the market watchdog ESMA,
tasked with outlining transparency requirements across different
asset classes, and the insurance authority EIOPA, which
differentiated between class A and class B securitisation under
its proposal on insurers' capital requirements.
The work undertaken by international standard-setters IOSCO
and IAIS on securitisation will also be taken into account,
Meanwhile, the authority is also finalising a report on risk
transfer, where it sets out how securitisation can be used as a
prudential tool by moving credit risk off bank balance sheets.
The report could be out by the end of June, sources told IFR.
(Reporting By Anna Brunetti)