What is securitisation?

When banks and other credit institutions package loans into securities and then sell them to investors, it's called 'securitisation'. It lets banks transfer the risk of some loans to other banks or long-term investors such as insurance companies and asset managers. This allows banks to use the capital that was set aside to cover the risk in those loans to create and sell new loans.

If it is structured soundly securitisation is an important channel for diversifying funding within the economy. However, since securitisation products played a significant role in the US subprime mortgage crisis beginning in 2007, European securitisation markets have remained subdued. The slow recovery of these markets reflects concerns among investors and prudential supervisors about the risks associated with the securitisation process itself.

New rules for simple and transparent securitisation

As part of the capital markets union action plan, the Commission proposed 2 legislative measures to promote a safe and liquid market for securitisation. These are:

  • a regulation on securitisation that will apply to all securitisation products and include due diligence, risk retention and transparency rules together with a clear set of criteria to identify simple, transparent and standardised (STS) securitisations
  • an amendment to the regulation on capital requirements to make the capital treatment of securitisations for banks and investment firms more risk-sensitive and able to properly reflect the specific features of STS securitisations

These rules aim to re-establish a safe securitisation market in Europe by differentiating simple, transparent and standardised securitisation products from more opaque and complex ones.

Background

At the global level, the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO) jointly lead a task force on the obstacles to securitisation. Its main task is to develop criteria to identify simple, transparent and comparable securitisation instruments. The group issued a set of global criteria on 23 July 2015.

The BCBS also published revised standards on the capital treatment of banks’ exposures  to securitisations in December 2014.

At the EU level, the European Banking Authority (EBA) delivered its advice, requested by the Commission, on a framework for qualifying securitisation in July 2015.

The new EU rules on the identification of the STS criteria and the capital treatment of securitisation exposures of banks take into account the conclusions of the EBA report.

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