Explanatory Memorandum to COM(2015)473 - Amendment of Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2015)473 - Amendment of Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms. |
|---|---|
| source | COM(2015)473  |
| date | 30-09-2015 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
Promoting the development of a securitisation market based on sound practices will contribute to a return to sustainable growth and job creation, consistent with the Commission's priority objective. Furthermore, a common, high quality EU securitisation framework will promote further integration of financial markets in the Union, help diversify funding sources and unlock capital, making it easier for credit institutions to lend to households and businesses. In order to attain this objective, the following two steps must be taken.
The first step is to develop a common substantive framework for securitisations for all participants in this market and identify a subset of transactions meeting certain eligibility criteria: simple, transparent and standardised securitisations or STS securitisations. This is the subject of the Commission Proposal for a Securitisation Regulation. The second step is to make amendments to the regulatory framework of securitisations in EU law, including in the area of capital charges for credit institutions and investment firms originating, sponsoring or investing in these instruments, to provide for a more risk-sensitive regulatory treatment for STS securitisations.
Such differentiated regulatory treatment already exists in certain legislative instruments, in particular in the Delegated Act on the prudential requirements the liquidity of banks (Liquidity Coverage Ratio) 1 . This must now be complemented by an amendment to the regulatory capital treatment for securitisations in Regulation No. 575/2013 (the 'CRR') 2 . The current securitisation framework in the CRR is essentially based on the standards developed by the Basel Committee on Banking Supervision ("BCBS") more than a decade ago and these do not make any distinction between STS securitisations and other more complex and opaque transactions.
Contents
- The global financial crisis revealed a number of shortcomings in the current securitisation framework. These include:
- - implement the regulatory capital calculation approaches set out in the Revised Basel Framework (Articles 254 to 268); and
- (a)Interaction and consistency between elements of the package
- (b)Calculation of risk weighted amounts for securitisation positions
- (c)A new Hierarchy of approaches (New Articles 254 to 270bis)
- (d)A more risk-sensitive treatment of STS securitisations
- (e)Caps
- (f)Elimination of special treatment for certain exposures
- (g)Treatment of specific exposures
- (h)Other main elements
The global financial crisis revealed a number of shortcomings in the current securitisation framework. These include:
• mechanistic reliance on external ratings in determining capital requirements;
• insufficient risk-sensitivity due to the lack of sufficient risk drivers across approaches in determining risk weights;
• procyclical cliff effects in capital requirements.
In order to address these shortcomings and contribute to enhancing the resilience of institutions to market shocks, the BCBS adopted a recommendation for a revised securitisation framework in December 2014 3 ("the Revised Basel Framework"). The Revised Basel Framework has been designed to reduce the complexity of the current regulatory capital requirements, reflect better the risks of positions in a securitisation and allow the use of the information available to institution to allocate capital requirements based on their own calculations, thus reducing reliance on external ratings. Under the Revised Basel Framework, institutions may calculate capital requirements for their securitisation positions in accordance with a single hierarchy of approaches, which starts with the Internal Ratings Based Approach at the top. If an institution cannot use the approach based on internal ratings, it must use an External Ratings Based Approach, provided the exposure has an external credit assessment which meets a series of operational requirements. In case the Institution cannot use the External Ratings Based Approach, either because is located in a jurisdiction that doesn't permit its use or because it lacks the information needed to use that approach, shall use a Standardised Approach based on a supervisory-provided formula.
The Revised Basel Framework does not currently provide for a more risk-sensitive treatment for STS securitisations. However the BCBS is currently working on the incorporation in the new framework 4 of the STS criteria adopted jointly with the International Organisation of Securities Commission (IOSCO) on 23 July 2015. No outcome is expected from this workstream before mid-2016.
At an European level, following a call for advice from the Commission, the European Banking Authority ("EBA") issued a report on qualifying securitisations on 7 July 2015 5 which recommended lowering capital charges for STS securitisations to a prudent level relative to those set out in the Revised Basel Framework and amend the regulatory capital requirements for securitisations set out in the CRR in line with the Revised Basel Framework to address the weaknesses of the current rules. For STS securitisations, the EBA re-calibrated downwards the 3 approaches developed by the BCBS for the Revised Basel Framework.
In order to contribute to the overarching objectives of the Commission Proposal for a Securitisation Regulation of restarting securitisation markets on a more sustainable basis and making this a safe and efficient instrument for funding and risk management, it is proposed to amend the regulatory capital requirements for securitisations in the CRR in order to:
- implement the regulatory capital calculation approaches set out in the Revised Basel Framework (Articles 254 to 268); and
- introduce a re-calibration for STS securitisations, consistent with the recommendation of the EBA (Articles 243, 260, 262, and 264).
In the first instance and to remove any form of mechanistic reliance on external ratings, an institution should use its own calculation of regulatory capital requirements where the institution has permission to use the Internal Ratings Based approach (IRB) in relation to exposures of the same type as those underlying the securitisation and is able to calculate regulatory capital requirements in relation to the underlying exposures as if these had not been securitised ("Kirb"), in each case subject to certain pre-defined inputs (the 'SEC-IRBA'). A Securitisation External Ratings-Based Approach ("SEC-ERBA") should then be available to institutions that may not use the SEC-IRBA in relation to their positions in a given securitisation. Under the SEC-ERBA, capital requirements should be assigned to securitisation tranches on the basis of their external rating. When the first two approaches are not available or the use of the SEC-ERBA would result in incommensurate regulatory capital requirements relative to the credit risk embedded in the underlying exposures, institutions should be able to apply the Securitisation Standardised Approach (the 'SEC-SA') which should rely on a supervisory-provided formula using as an input the capital requirements that would be calculated under the SA in relation to the underlying exposures if these had not been securitised ("Ksa").
In addition to contributing to the re-launch of securitisation markets, this proposal will also allow the Commission to act as a front-runner with regard to potential future developments of the BCBS workstream on the regulatory treatment of STS securitisations and contribute to achieving the objectives of such workstream from an EU perspective.
No later than 3-years from the entry into force of this Regulation the Commission will review the proposed approach to capital requirements for securitisation exposures, including the hierarchy of approaches, taking into account its impact on securitisation markets developments and the need to preserve financial stability in the EU.
• Consistency with existing policy provisions in the policy area
The revisions to the regulatory capital treatment of securitisation in the CRR are part of the Commission proposed legislative package which includes the Securitisation Regulation and which is intended to identify STS criteria and establish a common set of rules for all financial services sectors in the areas of risk retention, due diligence and disclosure requirements. The development of a safer and more sustainable EU securitisation market constitutes a building block of the Capital Markets Union project and will contribute to achieving the project's objectives in terms of higher integration of financial markets and more diversified sources of funding for the EU economy.
• Consistency with other Union policies
In the Investment Plan for Europe presented by the Commission on 26 November 2014, creating a sustainable market for high-quality securitisation was identified as one of the five areas where short-term action was needed. This amending Regulation will contribute to the Commission's priority objective of supporting job creation and sustainable growth without repeating the mistakes made before the crisis. Moreover this revised prudential framework will promote further integration of EU financial markets and help diversify funding sources and unlock capital for EU businesses. Finally, the revised prudential framework will contribute to a more efficient capital allocation and portfolio diversification for investors and will enhance overall efficiency of EU capital markets.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
The legal basis for this proposal is Article 114(1) of the Treaty on the Functioning of the European Union ("TFEU") which empowers the Parliament and the Council to adopt measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market.
The CRR, as amended in accordance with the present proposal, lays down a harmonised EU prudential framework for credit institutions and investment firms through the establishment of uniform and directly applicable rules to those institutions, including in the area of capital charges for credit risk attached to securitisation positions. This harmonisation will ensure a level playing field for EU credit institutions and investment firms and will boost confidence in the stability of institutions across the EU, including with respect to their activity as investors, originators or sponsors in securitisation markets.
• Subsidiarity (for non-exclusive competence)
Only EU legislation can ensure that the regulatory capital treatment for securitisation is the same for all credit institutions and investment firms operating in more than one Member State. Harmonised regulatory capital requirements ensure a level playing field, reduce regulatory complexity, avoid unwarranted compliance costs for cross-border activities, promote further integration in the EU markets and contribute to the elimination of regulatory arbitrage opportunities. Action at an EU level also ensures a high level of financial stability across the EU. For these reasons, regulatory capital requirements for securitisations are set out in the CRR and only amendments to that Regulation would achieve the purpose sought by this proposal. Accordingly, this proposal complies with the principles of subsidiarity and proportionality set out in Article 5 TFEU.
• Proportionality
The proposal only makes targeted amendments to the CRR insofar as such changes are necessary to address the problem described in Section 1.
• Choice of the instrument
A regulation was chosen because the proposal requires amending the CRR.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Stakeholder consultations
The Commission services have closely followed and participated in the work of European and international fora, with particular regard to the relevant EBA and BCBS workstreams.
The Commission also conducted a public consultation in February 2015, covering the main elements of this proposal. The Commission received comments from a variety of respondents, including a relevant number of stakeholders in the banking sector (supervisory authorities, central banks, industry), which highlighted the wide consensus on the need for EU action in this field and provided input on the specific actions to be implemented and their potential benefits and costs. Responses to the public consultation are summarised in the accompanying impact assessment. Individual responses are available on the Commission's 'EUSurvey' webpage 6 .
In addition, the Commission conducted separate consultations with Member States through the Expert Group on Banking, Payments and Insurance at its meeting of 22 July, 2015.
• Collection and use of expertise
As a follow-up to the Green Paper on long-term financing of the European economy 7 , the Commission issued a call for advice addressed to the EBA in order to gather evidence and collect the input on the most appropriate characteristics to identify STS securitisations and on the appropriateness, from a prudential perspective, of granting a differentiated preferential treatment to STS securitisations in order to foster EU securitisation markets.
EBA replied to Commission's call through the publication on 7 July, 2015 of the EBA report on qualifying securitisations.
• Impact assessment
For the preparation of this proposal an Impact Assessment was prepared and discussed with an Interservices Steering Group.
The impact assessment accompanying the Securitisation Regulation clearly shows the benefits in terms of efficiency and effectiveness of a) introducing a revised regulatory framework on capital charges for exposures to securitisations, and b) differentiating the treatment of STS securitisations having regard to the overall objectives of the Commission legislative package on securitisation, i.e. remove stigma attached to securitisations among investors; remove regulatory disadvantages for STS products; and reduce or eliminate unduly high operational costs for issuers and investors. Introducing a clear distinction between STS and non-STS securitisations in the area of capital charges will bring a number of positive effects, namely:
– the resulting securitisation framework would be more risk-sensitive and better balanced;
– preferential capital requirements would incentivise banks to comply with differentiated STS criteria;
– investors would be encouraged to re-enter the securitisation market, as a differentiated framework would send a clear signal that risks are now better calibrated and, therefore, the likelihood of a systemic crisis reoccurring would have been reduced.
The Impact Assessment report was submitted to the Regulatory Scrutiny Board on 17 June 2015. The board meeting took place on 15 July 2015. The Board gave a positive opinion on the suggested amendments to the regulatory capital treatment for institutions subject to the CRR.
• Regulatory fitness and simplification
This proposal would deliver a substantial simplification of the prudential regulatory capital framework applicable to credit institutions and investment firms investing, originating or sponsoring securitisations through a single hierarchy of approaches applicable to all institutions, regardless of the approach used for the calculation of capital requirements associated with the underlying exposures, and the deletion of several specific treatments for certain categories of securitisation positions. Comparability across institutions would be enhanced and compliance costs substantially reduced.
• Fundamental rights
The proposal does not have consequences for the protection of fundamental rights.
4. BUDGETARY IMPLICATIONS
This proposal does not have any budgetary implications.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
A close monitoring of the impact of the new framework will be carried out in cooperation with the EBA and competent supervisory authorities on the basis of the supervisory reporting arrangements and disclosure requirements by institutions provided for in the CRR. Monitoring and evaluation of the new framework will be also implemented at a global level, with particular regard to the BCBS as part of its mission.
• Explanatory documents (for directives)
Not applicable.
6. DETAILED EXPLANATION OF THE SPECIFIC PROVISIONS OF THE PROPOSAL
This Regulation forms a legislative package with the proposed Securitisation Regulation. As pointed out by many stakeholders during the consultation process, the development of STS eligibility criteria would not be sufficient per se to achieve the objective of reviving EU securitisation markets if not accompanied with a new prudential treatment, including in the area of capital requirements, better reflecting their specific features.
Capital requirements for positions in securitisation, including the more risk-sensitive treatment for STS securitisations, are set out in the present proposal while eligibility criteria for STS securitisations, together with other cross-sectoral provisions, are contained in the Securitisation Regulation. These notably encompass all provisions on risk retention, due diligence and disclosure requirements, previously included in Part V of CRR. The same applies to some definitions originally included in Article 4 which are of general nature and therefore have been moved to the cross-sectoral legislative framework.
The current proposal will be followed at a later stage by an amendment to the LCR Delegated Act in order to align it with the Securitisation Regulation. In particular the eligibility criteria for securitisations as Level 2B assets in Article 13 of the LCR Delegated Act will be amended to make it consistent with the general STS criteria as laid down in the Securitisation Regulation. Amendments of this Delegated Act could not be made at this time since they follow a different procedure and depend on the outcome of the legislative negotiations on this package.
In order to preserve and enhance internal consistency and overall coherence of the text, the entire Chapter 5 of Title II, Part Three of CRR is replaced through the current proposal although several Articles are subject to limited refinements. This in particular concerns Section 2 (Recognition of significant risk transfer), part of Section 3 (Subsection 1: General Provisions) and Section 4 (External credit Assessments).
The most relevant changes are contained in new Articles 254 to 270a. On the basis of the revised BCBS framework a new sequence of applicable approaches for the calculation of Risk Weighted Assets (RWAs) for securitisation exposures is implemented. The use of each of the approaches depends on the information available to the institution holding the securitisation position. This single hierarchy of approaches will apply to both institutions using the standardised approach (SA) or the internal ratings based approach (IRB) for credit risk.
The Internal Ratings-Based Approach (SEC-IRBA) is at the top of the revised hierarchy and uses KIRB information as a key input. KIRB is the capital charge for the underlying exposures using the IRB framework (either the advanced or foundation approaches). In order to use the SEC-IRBA, the bank shall have: (i) a supervisory-approved IRB model for the type of underlying exposures in the securitisation pool; and (ii) sufficient information to estimate KIRB. Since the relevant effects of maturity are not fully captured through KIRB alone, the SEC-IRBA explicitly incorporates tranche maturity as an additional risk driver. Tranche maturity definition is based on the weighted-average maturity of the contractual cash flows of the tranche. Instead of calculating the weighted-average maturity an institution is allowed to choose simply to use the final legal maturity (with the application of a haircut). A 5-year cap and a 1-year floor are applicable in all cases.
An institution that cannot calculate KIRB for a given securitisation position will have to use the External Ratings-Based Approach (SEC-ERBA) for the calculation of the risk-weighted exposure amounts. Under the ERBA, RWs are assigned according to credit assessments (or inferred ratings), the seniority of the position and the granularity of the underlying pool. Where an institution cannot use the SEC-ERBA, it shall apply instead the Securitisation Standardised Approach (SEC-SA). The SA uses KSA, that is, the capital charge for the underlying exposures under the SA, and a factor “W”, which is the ratio of the sum of the amount of all underlying pool of exposures that are delinquent to the total amount of underlying exposures. Where the SEC-ERBA results in regulatory capital requirements which are not commensurate to the credit risk embedded in the exposures underlying a securitisation, institutions may apply the SEC-SA directly in relation to the positions of that securitisation, subject to the competent authority's review.
An institution that cannot use SEC-IRBA, SEC-ERBA, or SEC-SA for a given securitisation exposure will have to assign the exposure a risk weight of 1,250%.
A risk weight floor of 15% is set for all securitisation exposures and for all the three approaches. The risk weight floor is justified by certain risks, including model and agency risks, which are arguably more acute for securitisations exposures than for other categories of exposures and can lead to a certain amount of uncertainty in capital estimates despite overall enhanced risk-sensitivity of the new framework.
A more risk-sensitive prudential treatment is provided for STS securitisations in line with the methodology proposed by the EBA in the report on qualifying securitisations under all the 3 new approaches for the calculation of RWAs (New Articles 260, 262, and 264). The 3 approaches are re-calibrated for all tranches in order to generate lower capital charges for positions in transactions qualifying as STS securitisations.
In addition to the re-calibration of the 3 approaches, senior positions in STS securitisations will also benefit from a lower floor of 10% (instead of 15% which will remain applicable to both non-senior positions in STS securitisations and to non-STS securitisations generally). It has been set in order to recognise, on the basis of EBA analysis, the materially better historical performance of STS senior tranches with respect to non-senior qualifying tranches, which is fully justified by the fact that STS features are able to materially reduce model and agency risks.
For the purposes of calculating risk-weighted exposure amounts, eligible STS securitisations, as defined in accordance with the Securitisation Regulation, shall fulfil additional requirements related to the underlying exposures, namely credit granting standards, minimum granularity and maximum Risk Weights (RWs) under the SA approach. Specific additional criteria are set also for Asset Backed Commercial Paper ("ABCP").
• The maximum risk weight for senior securitisation positions (new Article 267)
Under the so-called look-trough approach a securitisation position receives a maximum RW equal to the average RW applicable to the underlying exposures. According to existing rules the look-through approach can be used for the calculation of risk-weighted exposure of unrated positions (Article 253 CRR). It is now proposed, in line with the revised BCBS framework, to allow the look-through approach only for senior securitisation positions whether or not the relevant position is rated and regardless of the approach used for the underlying pool of exposures (SA or IRBA), provided that the bank is able to determine KIRB or KSA for underlying exposures. In light of the credit enhancement the senior tranches receive from subordinated tranches, an institution should not have to apply to a senior securitisation position a higher risk weight than if it held in relation to the underlying exposures directly.
• Maximum capital requirements (new article 268)
An overall cap in terms of maximum risk-weighted exposure amounts is currently foreseen for institutions that can calculate KIRB (Article 260). It is now proposed to a) keep this treatment, i.e. institutions that use the SEC-IRBA for a securitisation position may apply a maximum capital requirements for that position equal to the capital requirement that would have been held against the underlying exposures under the IRB had they not been securitised; and b) extend the same treatment to originator and sponsor institutions using SEC-ERBA and SEC-SA. This can be justified on the grounds that, from an originator's standpoint, the securitisation process can be viewed as similar to credit risk mitigation, i.e. it has the effect of transferring at least some of the risks of the underlying exposures to another party. From this perspective, provided the conditions for significant risk transfer are fulfilled, it would be not justified for an institution to have to hold more capital after securitisation than before, as the risks attached to the underlying exposures are reduced through the process of securitisation.
In order to further reduce complexity in the framework and improve consistency within the securitisation framework, it is proposed to eliminate a series of special treatments currently provided for in CRR
– Second-loss or better positions in ABCP programs (current Article 254);
– Treatment of unrated liquidity facilities (current Article 255);
– Additional own funds securitisations of revolving exposures with early amortisation provisions (current Article 256).
• Re-securitisations (New Article 269)
A more conservative version of the SEC-SA will be the only approach available for re-securitisation positions which will be subject to significantly higher risk weight floor (100%).
• Senior positions in SME securitisations (New Article 270)
Taking into account that the overarching objective of the securitisation package is to contribute to generating an adequate flow of funding to support EU economic growth and that the SMEs constitute the backbone of the EU economy, a specific provision on SME securitisations is included in the present Regulation (Article 270). It targets in particular those securitisations of SME loans where the credit risk related to the mezzanine tranche (and in some cases the junior tranche) is guaranteed by a restricted list of third parties, including in particular the central government or central bank of a Member State, or counter-guaranteed by one of those (this scheme is usually defined tranched cover). Given the relevance of these schemes in order to free capital to be used to increase lending to SMEs, it is proposed to grant a more risk-sensitive treatment, equivalent to that foreseen for STS securitisations, to the senior tranche retained by the originator institution. In order to qualify for this treatment the securitisation shall comply with a series of operational requirements, including applicable STS criteria. Where such transactions benefit from this type of guarantee or counterguarantee, the preferential regulatory capital treatment that would be available to them under Regulation (EU) No 575/2013 is without prejudice to compliance with the State Aid rules.
• Amendments to Part Five (Exposures to Transferred Credit Risk)
Taking into account the parallel introduction in the Securitisation Regulation of a general framework on requirements for originator, sponsor and investor institutions applicable to all financial sectors, all the provisions included in Part Five (Articles 404 to 410) are repealed. Only the contents of Article 407 (Additional risk weight) and the correspondent empowerment of the Commission for the adoption of an ITS 8 are kept and this shall be found in new Article 270bis.
• Amendments to Article 456
It is proposed to amend the Article 456 to empower the Commission, as it is the case of other categories of own funds requirements, to adopt delegated act in order to incorporate any relevant developments at international level with particular regard to the on-going BCBS workstream.
• Review clause (Article 519a)
Within three years from the date of entry into force of this Regulation, the Commission will report to the Council and the Parliament on the impact of the new regulatory capital framework on EU securitisation markets. On the basis of its analysis and taking into account international regulatory developments and the need to safeguard financial stability, the Commission may propose further amendments to the CRR in relation to, inter alia, the hierarchy of approaches in accordance with Article 456.
• Entry into force
The entry into force of the new provisions is set at […].