LONDON, April 25 (IFR) - Policy-makers should boil down a
standard definition of high-quality securitisation pivoting
around the European Central Bank collateral-eligibility criteria
to boost the recovery of the asset class, market participants
Analysts seem to agree that there is no easy way around the
differentiation of sound, premium-quality ABS from more opaque
structures as the preliminary step in any regulatory relief, and
so promote the ECB's criteria as the basis for cherry-picking
Greeting the recent joint paper by the European Central Bank
and the Bank of England as a "eureka moment" for the industry,
market players now seek to answer one question: what would it
mean, in concrete terms, to remove regulatory roadblocks from
BALANCING WORDS AND ACTIONS
"There is a sense of urgency in the document that
represents almost a eureka moment for the market, after years
when regulators have overcompensated for the faults of the
crisis," said a senior securitisation official at a UK bank.
"The paper really indicates the two central banks won't have
much tolerance for further delays" from other regulators, he
But drawing a line between highly liquid ABS and less
straightforward ones - the necessary preamble that the European
Commission itself has been said to be working on - will be a
challenging balancing act.
"The complexity of defining an abstract premium quality
standard for ABS should not be underestimated," said Ralf
Raebel, senior analyst at DZ Bank's ABS team, "especially since
every crisis has its own 'quality problems' and a blanket cover
of all eventualities ex ante is practically impossible."
Analysts are calling on regulators to mitigate existing
definitions by the EU insurance watchdog and indirectly by the
Basel Committee and the European Banking Authority - in their
draft Liquidity Coverage Ratio - with the more permissive
criteria of the ECB collateral eligibility. This would allow the
asset class to be assessed and differentiated fairly.
ABS researchers at Bank of America Merrill Lynch, headed by
Alexander Batchvarov, wrote that they expect "the range of
securitisations which high-quality securitisation is likely to
embrace to be larger than what the market may have been led to
believe" by regulators' definitions. These could enjoy
preferential capital treatment under Solvency II and CRD IV and
count as liquidity buffers under Basel III and EBA guidance.
"We base our view on the need to have the broadest possible
diversity in HQS," the analysts added, echoing a common view.
Collateral eligibility criteria would prove, for intrinsic
reasons, sufficiently sound for assessing ABS liquidity.
The ECB and the Bank of England acted quite early in the
post-crisis era to identify measures to improve the image of
securitisation, said Andrew South, head of European structured
finance research at S&P Ratings Services.
"They had a strong interest in figuring out what they
considered to be high-quality transactions," he said, as many
financial institutions starved of liquidity were posting ABS as
collateral against central bank borrowing. This prompted them to
draw up pivotal initiatives, such as the loan-level reporting
requirements, at an early stage, he added.
Instead, EIOPA's distinction between a Class A ABS - spared
from heavier capital charges - and a Class B would group
together a large variety of assets in the second class. Critics
say this could keep the securities stigmatised, impacting on
investors' liquidity and risk-control strategies.
SHORTFALLS IN BASEL AND EBA
The Basel Committee and the EBA's current proposals for
high-quality liquid assets (HQLA) are restricted to certain
RMBS. This critically excludes entire ABS classes - such as auto
ABS or credit cards ABS - and significant players in the
European market, analysts argued.
"Less than 20% of the placed European ABS universe would be
eligible HQLA under the BCBS proposal, while an even smaller
portion of the market might qualify under the EBA proposal,"
said analysts at Nomura ABS research team in a recent note.
The 80% average LTV limit set out under Basel framework
would also rule out prime products such as Dutch RMBS, which
paradoxically represents "one of the largest and best performing
markets", noted South.
Raebel said that if the EBA HQLA recommendations came into
effect they "would generally have negative implications for the
non-RMBS asset classes, as demand by the banks, which make up
around 30% of investors on non-RMBS, could fall away".
Raebel pointed out that, if anything, the EBA's HQLA
definition potentially incentivises banks to increasingly submit
non-HQLAs, such as auto ABS or even SME transactions and CMBS,
to the ECB for repo.
Positively, though, "a detour via the ECB would not only
provide the opportunity to 'appraise' several ABS asset classes
beyond RMBS, but to apply lower haircuts as well", he argued.
The ECB criteria currently haircut AAA to A- rated ABS bonds
by 10%, and bonds rated BBB to BBB- by 22%, well below the 25%
recommended by the EBA and the Basel Committee.
Under this light, it would be desirable to "align the LCR
and ECB criteria", he argued.
While the ECB and the Bank of England prepare to disclose
more details of their plans in May, analysts said a first
response by the European Commission could come by the end of
June, when the authority is due to adopt the final version of
the LCR within its bank capital law.
However, a broader clarification on the regulatory treatment
of ABS is unlikely before the end of the year, they said.
(Reporting By Anna Brunetti, editing by Anil Mayre)