BCBS’ amendments on Simple, Transparent and Comparable (STC) securitisations

BCBS’ amendments on Simple, Transparent and Comparable (STC) securitisations

Thu 14 Jul 2016

As implied in the BCBS consultative document on November 2015, the BCBS published new standards on 11 July 2016 to include amendments on STC securitisations and thus make its final decision for their calibration.

The securitisation framework was highlighted in the 2008 financial crisis because of the major role of subprimes in the collapse of banks and the opacity revealed in the lack or asymmetry of information related to the underlying assets and the structure of the securitisation itself.

Even if the EU securitisation market performed better than the US one during the last crisis, with much fewer losses within the residential mortgage-backed security (RMBS) market, it has significantly decreased within 10 years. According to the working document delivered by the MEP, Paul Tang, on 19 May 2016, the volume of EU securitisations in 2014 was 42% lower than in the average period 2001-2008.

Based on this observation and in order to restore the confidence in the EU securitisation market, three main actions have been undertaken in the last few years:

  • At international level, the definition of a new type of Simple, Transparent and Comparable (STC) securitisation for which the level of required capital would be lower
  • At EU level:
    • The creation of a Capital Markets Union (CMU) to complete the Banking Union and strengthen the Economic and Monetary Union
    • The review of the securitisation framework through the Capital Requirements Regulation (CRR) and dedicated rules for Simple, Transparent and Standardised (STS) securitisations

Regarding the current regulatory rules, the Basel III standards have not yet brought  changes in this area (the last main changes have been implemented by the Basel 2.5 framework and resecuritisations). But in December 2014, the Basel Committee on Banking Supervision (BCBS) published standards to propose a revision of the securitisation framework in the banking book, one of the keystones of the Basel III reforms which have to be finalised this year. Changes regarding securitisations in the trading book are part of the revised market risk framework.

As implied in the BCBS consultative document on November 2015, the BCBS published new standards on 11 July 2016 to include amendments on STC securitisations and thus make its final decision for their calibration.

In a regulatory landscape where constraints weigh significantly on banks’ balance sheets and ratios, securitisations and especially STC securitisations could be a good alternative for deleveraging, while reducing capital requirements and relaunching SMEs financing in a safe and sound manner.

Key dates as a reminder

Before listing the BCBS amendments, here are the main steps related to the securitisation framework:

  • 11 December 2014: Basel standards for a revised framework based on three approaches (SEC-IRBA, SEC-ERBA and SEC-SA)
  • 7 July 2015: EBA report on qualifying securitisations
  • 23 July 2015: BCBS/IOSCO document about the criteria for identifying STC securitisations
  • 30 September 2015: EU Commission’s proposal for common rules on securitisations and the creation of a European framework for STS securitisations
  • 10 November 2015: BCBS consultative document about the capital treatment for STC securitisations
  • 2 December 2015: Member States’ approval regarding the EU Commission’s proposal
  • 1 January 2018: Entry into force of the revised securitisation framework
  • 2019: Implementation of the CMU

It is essential to mention the creation of the CMU when talking about securitisations because the latter is one of its main components.

Key attributes and objectives of STS/STC securitisations

STS securitisations encompass long-term and short-term securitisations (except for Asset-Backed Commercial Paper (ABCP) programmes), but exclude synthetic ones at this stage. The underlying exposures have to be perfectly transferred, form a homogeneous portfolio and not be securitisations themselves (see article 8 of the EU Commission’s proposal).

The STC criteria thus aim to enable comparison across securitisation products, either for investors or supervisors, and helping assess the risk of securitisation exposures.

BCBS’ amendments to STC criteria

To be recognised as an STC, a securitisation has to comply with 14 criteria in order for it to receive an alternative regulatory capital treatment.

Among the main criteria are included:

  •  The characteristics of the underlying assets which have to be simple but also homogeneous, including  the payment or principal/interests and  risk profiles
  • The underlying exposures have to be performing as well (e.g., the obligor must not have met difficulties within the three years prior to the date of origination), which emphasises the need to have a common definition of performance within the EU (see BCBS consultation launched on 14 April 2016 about the definition of NPL and Forbearance) and meet specific criteria relating to debt ratios or the characteristics of borrowers
  • The underlying exposures have to apply the Standardised approach for credit risk and the risk weighted requirements after potential credit risk mitigation are equal to or less than a certain level depending on the asset class – the risk weights indicated in the BCBS paper are transitional and will be reviewed once the revision of the Standardised approach for credit risk is finalised 
  • The transfer of assets has to be realised in a ‘true sale’ framework, which also includes the transfer of voting rights
  • The documentation disclosure aims at providing transparency to investors, notably to help them in their due diligence. The BCBS expects originators to give all the necessary information to investors, so that the latter can determine if the securitisation is STC-compliant or not. This process has to be respected during the whole life of the securitisation.

Thus, this amendment enables clarification of the criteria which have to be met for a securitisation to be STC-compliant. Even if some aspects still have to be confirmed in the near future (finalisation of the other Basel III reforms, final position of the EU parliament as well as the enhancement of consistency in the EU through the creation of the CMU), this consultation paper aims to improve harmonisation within the EU and may help in relaunching the securitisation market in Europe.

Post authored by Audrey Cauchet.