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 say.
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 assets.
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 securitised markets? 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 added.
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)