June 20, 2014 / 3:52 PM / 3 years ago

High-quality ABS could get boost under delayed EU liquidity rules

* EC pushes back deadline to determine liquidity buffer composition

* High quality ABS may have case for inclusion in LCR principles

* EBA set to streamline criteria to define High-Quality Securitisation

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 September.

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% haircut.

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.


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 granular criteria.

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 transparency.

“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, Farkas said.

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)

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