* 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
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
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.
BASEL/IOSCO STC PROPOSAL
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
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
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
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
"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,
"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