* STC paper fails to add certainty on preferential treatment
* EBA recommandations bolder, but still insufficient
By Anna Brunetti
LONDON, July 24 (IFR) - Global policymakers last week published criteria to identify Simple, Transparent and Comparable securitisation but dashed the industry’s hopes for an immediate recommendation of lower capital charges for qualifying deals.
The joint securitisation task force of the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions posted its STC paper on Thursday - a few weeks after the European Banking Authority published its own guidance on which transactions can be granted preferential treatment.
A softening of the capital treatment for qualifying deals is at the core of industry expectations, fuelled by recent rhetoric from European policymakers to boost the market by removing hurdles to issuance and investment.
But the taskforce’s paper lacked concrete capital proposals, leaving it one step behind the EBA initiative which spelt out when deals could benefit from lower charges on the basis of additional credit criteria.
The EBA partly addressed a key complaint from the industry regarding the fact that capital charges are much higher on securitised loans than on non-securitised ones - generally referred to as non-neutrality.
“The EBA at least is the only regulator so far that speaks about the non-neutrality ratio, especially when external ratings are used, while Basel swipes the problem under the carpet,” said Georges Duponcheele, head of banking solutions at BNP Paribas.
“Under the external-rating based approach, there is a massive discrepancy between the levels of capital requirements prior and after securitising a pool, and this is ultimately what originators care for.”
But the EBA proposed reducing the non-neutrality factor by only 24%, a number that Duponcheele and Ian Bell, head of the Prime Collateralised Securities secretariat, said would lead to underwhelming results given the current starting point.
Average capital charges on ABS currently amount to four to five times those applied to simple loans, they said.
“This makes the expected reduction in ERBA (external-rating based approach) levels financially meaningless from the point of view of the market,” Duponcheele said.
The EBA set out plans last year that securitisations that are simple, standard and transparent warrant different capital treatment from other deals.
“When you reduce the non-neutrality ratio by 24%, you’re effectively saying that you expect your STS criteria to solve less than a quarter of the pre-2007 problems,” Bell said.
“Given the 57 STS criteria the EBA laid out to reduce securitisation’s structural non-asset risk, it’s like saying you don’t expect those criteria to make any difference for three quarters of transactions,” he said.
The proposal published on Thursday by Basel and IOSCO puts forward similar non-credit criteria, and is broadly in line with the consultation the duo posted in December. See IFR issue 2063.
However, the standard-setters said they amended “certain aspects of the criteria that were considered overly prescriptive.”
Compared with the previous version, the text softens the recommendation for an established track record of the originators and other parties involved in the deal.
This set of criteria also excludes non-performing assets as well as assets that show an increase in expected losses or enforcement actions at the structuring stage of the deal.
Underwriting standards should be stable and not less stringent than those applied to credit claims and receivables retained on the balance sheet.
The second criteria sets out that interest rate and foreign currency risks should be mitigated throughout the life of the transaction but, compared with the consultation document, clarifies that this doesn’t necessarily require a matching hedge.
The payment priority waterfall must be consistent through the life of the bonds and clearly disclosed to investors, who must be able to clearly identify any asset performance remedies on an ongoing basis.
While the STC paper may have stopped short of capital proposals, the Basel Committee is said to be unofficially testing the ground for revised capital charges through a questionnaire on banks’ trading books.
This could signal that the global standard-setter is ready to mimic European initiatives and send more pragmatic signals to the industry.
But Bell and Vincent Keaveny, securitisation partner at Baker&McKenzie, argued that it is hard to envisage the trading book review being the main route to revise the securitisation framework.
“Addressing securitisation within the trading book would probably be of a limited relevance to the market, because the real issue lies elsewhere,” Keaveny said.
“The key concern of the market is how to get a substantial body of investors back, which means tackling capital and solvency requirements for the banking book and for insurers.”
Bell said that how the Basel workstream on securitisation is going to play out is anybody’s guess.
The translation of the STC criteria into lower requirements has been less certain at the global level than at the European one, given the different needs of other jurisdictions.
“They would need to reach consensus on new rules - but we have heard that the US representatives at the Basel Committee have already made it clear they have little appetite for a bifurcation of rules for STC and non-STC,” Bell said.
This may put a strain on the softening of Basel’s capital framework for securitisation.
Under that framework, the ERBA produces penalising charges, Duponcheele said.
“The EBA managed to modify capital requirements while staying fully compliant with the Basel approach.” This in turns mean it didn’t solve the flaws of the ERBA.
Until that approach is revised, the ABS market has little to hope for, he said. (Reporting By Anna Brunetti, Editing by Alex Chambers and Julian Baker)