Explanatory Memorandum to COM(2020)282 - Amendment of regulation 2017/2402 on a general and a specific framework for simple, transparent and standardised securitisation to help the recovery from COVID-19 - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2020)282 - Amendment of regulation 2017/2402 on a general and a specific framework for simple, transparent and standardised ... |
|---|---|
| source | COM(2020)282  |
| date | 24-07-2020 |
1. CONTEXTOFTHE PROPOSAL
• Reasons for and objectives of the proposal
Regulation (EU) 2017/2402 (the Securitisation Regulation1) together with Regulation (EU) 575/2013 (the CRR Regulation2) establish a general EU framework for securitisation and create a specific framework for simple, transparent and standardised (STS) securitisation. The objective of the framework is to promote a safe, deep, liquid and robust market for securitisation, which is able to attract a broad and stable investor base to help allocate finance to where it is most needed in the economy. The new securitisation regime is in place since January 2019 and it is a cornerstone of the EU’s efforts to establish a Capital Markets Union.
The severe economic shock caused by the COVID-19 pandemic and the exceptional containment measures are having a far-reaching impact on the economy. Businesses are facing disruption in supply chains, temporary closures and reduced demand. Public authorities at Union and Member State levels have taken decisive actions to support solvent undertakings to withstand this severe but temporary slowdown in economic activity and the liquidity shortages that it will cause.
The European Commission’s summer 2020 economic forecast3 points to a very deep recession as economic activity collapsed in the first half of 2020 and real GDP for 2020 as a whole in the EU is projected to decline by 8.3%. The magnitude of the economic decline is thus expected to be much more severe than the one observed in 2009, while the recovery prospects are uneven and uncertain. This is why the immediate emergency measures should be complemented by targeted measures of more medium-term effect that can support a speedy recovery.
It will remain key for the banks to be able to continue lending to corporates also in the coming months once the immediate shock of the COVID-19 crisis will have passed. Therefore, it is important to prepare or upgrade any tools allowing banks to maintain and even enhance their capacity to lend to the real economy, in particular to SMEs. Securitisation can be a key enabler in this respect. By transforming loans into tradable securities, securitisation could free up bank capital for further lending and allow a broader range of investors to fund the economic recovery.
The current framework does not reach its full potential in two respects, which are very important for fostering economic recovery: the framework does not cater for on-balance-sheet synthetic securitisation and it is not entirely fit for purpose for the securitisation of non performing exposures (NPEs).
Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012 – (OJ L 347/35, 28.12.2017
Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions.
https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-forecasts/summer-2020-economic-forecast-deeper-recession-wider-divergences_en.
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The securitisation framework will be subject to a comprehensive review with possible legislative amendments if appropriate due by January 2022. Nevertheless, the present proposal lays out targeted amendments now, given their usefulness for economic recovery. Waiting for the review of the framework in 2022 and possible legislative amendments would lead to desirable legal adjustments probably only in a few years’ time and thus frustrate the goal to use securitisation in the most efficient manner to promote the economic recovery in the coming months.
The current proposal does not substitute or diminish in any way the scope of the aforementioned review, which is mandated to take a broad look at the effects of the new regime, including issues such as the risk retention modalities, the use of private securitisations, the impact of the disclosure regime and others. The upcoming review will also take into account the recommendations of the High-Level Forum of the Capital Markets Union4 on scaling up the European securitisation market.
Moreover, these targeted amendments will not only make a contribution to funding the recovery, but they will also contribute to the resilience of our financial system: by extending the STS framework also to balance sheet securitisations it can be expected that the STS label with its additional requirements ensuring less complexity and more transparency will be used for a broader share of the EU securitisation market. This way we can provide additional incentives for securitisation to take place within the robust EU framework for Simple, Transparent and Standardised Securitisation and help banks find ways to share risk with capital market actors, which is one of the objectives of the Capital Markets Union project.
• Consistency with existing policy provisions in the policy area
The EU securitisation framework is in place since January 2019. The proposed amendments are fully consistent with the existing policy provisions in the field of securitisation. Provisions are also included in delegated and implementing acts. The proposed amendments are also in line with the prudential requirements for institutions and their supervision.
Consistency with other Union
policies
This proposal is part of the broader response by the European Commission to facilitate economic recovery post-COVID-19 pandemic, including the amendments to MiFID and Prospectus Regulation adopted at the same time as this proposal (insert right reference). It is fully consistent with the Commission Communication on the economic aspects of the coronavirus crisis issued on 13 March 20205, with ‘COVID 19 – Economic package – Using every available Euro’ launched on 2 April 20206 as well as with Commission Interpretative Communication on the application of the accounting and prudential frameworks to facilitate EU bank lending (Supporting businesses and households amid COVID-19)7.
https://ec.europa.eu/info/files/200610-cmu-high-level-forum-final-report_en.
Communication from the Commission to the European Parliament, the European Council, the Council,
economic response to the COVID-19 Outbreak, COM(2020) 112 final of 13.03.2020.
Communication from the Commission to the European Parliament, the European Council, the Council,
Response - Using every available euro in every way possible to protect lives and livelihoods,
COM(2020) 143 final of 02.04.2020.
frameworks to facilitate EU bank lending (Supporting businesses and households amid COVID-19).
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The securitisation framework is already an important building block of the Capital Markets Union. The CMU is one of the Commission's priorities to ensure that the financial system supports jobs and growth for an economy that works for people. It aims at better linking savings with growth and provide more options and better returns for savers and investors. It intends to offer businesses more funding choices at different stages of their development and to channel investment to where it can be used most productively, increasing the opportunities for Europe's companies and projects. Today’s proposal will reinforce and enlarge this framework bringing more opportunities. These amendments will help provide additional funding sources for companies, strengthen banks' ability to support the economy, diversify source of investments, expand investors’ base and spread risks across market participants, while avoiding the excesses that led to the financial crisis.
Finally, this initiative, in particular by removing regulatory obstacles to securitisation of NPEs, is in line with the Action Plan to tackle non-performing loans in Europe adopted by the ECOFIN Council in July 20178 as well as with the Commission Communication on completing the Banking Union9. They both call for the development of secondary markets for distressed assets. The need to take determined action to address NPEs has also been underlined in some European Semester recommendations to Member States.
2. LEGALBASIS, SUBSIDIARITYAND PROPORTIONALITY
• Legal basis
The legal basis of the STS Regulation is Article 114 of the Treaty on the Functioning of the European Union (TFEU) which confers to the European institutions the competence to lay down appropriate provisions that have as their objective the establishment and functioning of the single market. Those Regulations can only be amended , including by reducing their scope on a temporary basis, by the Union legislator, in this case on the basis of Article 114 of the Treaty.
• Subsidiarity
The amendments concern changes to Union rules in response to the COVID-19 pandemic and to foster economic recovery. The objectives pursued by the envisaged amendments can be better achieved at Union level rather than by different national initiatives. The proposal does not go beyond what is necessary to achieve those objectives.
The existing legal framework introducing an EU Securitisation framework was set up at Union level. Given the cross-border nature of securitisation, the scope of the proposed rules needs to be sufficiently aligned, coherent and consistent at Union level to be truly effective. Improving the existing legal framework cannot be achieved by Member States acting autonomously. The ability of Member States to adopt national measures is limited, given that the Securitisation Regulation already provides for a harmonised set of rules at EU level and changes at national level would conflict with Union law currently in force. In the absence of action by the Union the existing regulatory framework would be less effective in supporting the various measures taken by public authorities at both Union and national level and less
www.consilium.europa.eu/en/press/press-releases">https://www.consilium.europa.eu/en/press/press-releases .
Communication to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions on completing the Banking Union of 11 October 2017.
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reactive to exceptional market challenges. If the Union were to cease regulating those aspects, the internal market for securitisation would become subject to different sets of rules, leading to fragmentation and undermining the recently build single rulebook in this area. This would lead to an uneven playing field and to regulatory arbitrage.
Furthermore, action at national level cannot effectively create a more risk-sensitive treatment for securitisations, since the prudential treatment is already laid down in EU law, nor can it ensure consistency and standardisation of those provisions that are currently covered by different EU legal acts such as those regarding disclosure, due diligence and risk retention.
• Proportionality
This Union action is necessary to achieve the objective of expanding credit institutions’ and investment firms’ capacity to lend to corporates and SMEs and to free their balance sheets of non-performing exposures whilst maintaining the consistency of the prudential framework following the COVID-19 crisis. The proposed amendments are limited to what is necessary to achieve these objectives and build on rules already in force, in line with the principle of proportionality. The proposed amendments do not go beyond addressing selected provisions in the Union’s securitisation framework for credit institutions and investment firms that target exclusively measures aimed at ensuring support for the recovery of the economy in the months after the immediate COVID crisis. Moreover, the proposed amendments are limited to those issues which cannot be addressed within the existing margin of discretion the current rules provide for.
proposed rule changes are proportionate to the objectives.
• Choice of the instrument
The current proposal is an amendment of the Securitisation Regulation and, therefore, it is a Regulation. No alternative means – legislative or operational – can be used to attain the objectives of this proposal.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER
Contents
- CONSULTATIONS
- the European Central Bank, the European Investment Bank and the Eurogroup on Coordinated
- the European Economic and Social Committee and the Committee of the Regions on Coronavirus
- Commission Interpretative Communication on the application of the accounting and prudential
- The Commission considers that the
- Definition of an NPE securitisation (Article 2)
- Risk retention (Article 6)
- Verification of credit-granting standards (Article 9)
ANDIMPACTASSESSMENTS
Collection
and use of expertise
The proposal is based on two reports by the European Banking Authority – the Report on STS framework for Synthetic Securitisation under Article 45(1) of the Securitisation regulation (‘the STS synthetics report’)10 and the Opinion on the regulatory treatment of NPE securitisations (‘the NPE Opinion’)11.
The STS synthetics report is mandated by Article 45(1) of the Securitisation Regulation, which asks the EBA to analyse the feasibility of a specific framework for STS synthetic securitisation, limited to balance-sheet synthetic transactions.
On the basis of the analysis therein, the EBA STS synthetics report makes three recommendations:
10 https://eba.europa.eu/eba-proposes-framework-sts-synthetic-securitisation.
11 https://eba.europa.eu/eba-publishes-opinion-regulatory-treatment-non-performing-exposure-securitisations.
• to establish a cross-sectoral framework for simple, transparent and standardised synthetic securitisation, limited to balance-sheet securitisation;
• that to be eligible for the ‘STS’ label, synthetic securitisation shall comply with the
proposed criteria on simplicity, standardisation and transparency;
• to consider the risks and benefits of establishing a differentiated capital treatment for S TS balance sheet synthetic securitisation.
The Commission prepared a report, under Article 45(2) of the Securitisation Regulation, on the creation of a specific framework for simple, transparent and standardised synthetic securitisation, limited to balance-sheet synthetic securitisation. The Commission report accompanies this proposal. The Commission report agrees with the analysis conducted by the EBA, which shows that it is possible to set standards for synthetic securitisation that allow mitigating the main drivers of structuring risk, such as agency and model risks, in the same way as for traditional securitisation, thereby creating a subset of synthetic securitisation that is comparable to STS traditiona securitisation. Furthermore, there seems to be no evidence that would suggest that synthetic securitisation structure inherently results in higher losses than traditional securitisation structure. The analysis does not point to any material negative consequences that could be foreseeably generated by the creation of a specific STS framework for balance-sheet synthetic securitisati ons.
The NPE Opinion by EBA examined the role of securitisation as a funding tool for removing NPEs from the balance sheets of banks. The EBA analysis found a number of constraints in the Securitisation Regulation and in the Capital Requirements Regulation that restrict the market capacity to absorb non - perf o rming assets from the balance sheets of banks, thus largely limiting the market to bilateral sales only.
With regard to the Securitisation Regulation, the constraints on NPE se c ur itisatio ns result from certain elements of the risk retention and credit-granting standards requirements. Using nominal values for risk retention purposes overstates the intended requirement as it disregards the price discount at which the underlying assets are transferred and which represents the actual risk loss for investors. In addition, the text does not allow the risk retention requirement to be fulfilled by the special servicer, who usually has more substantive interest than the originator in the workout of the assets and value recovery and thus its interests are better aligned with those of the investors. Finally, the existing credit-granting standards requirement in Article 9 of the Securitisation Regulation also does not cater for NPE sec ur itisatio ns. The proposal clarifies the verification duties on originators when it comes to securitising non-performing exposures. In fact, the requirements have to take into account the specific circumstances of the purchase of the assets and the type of securitisation. In these cases, it may not be possible to gain certainty around the circumstances in which the assets were created, but it is nonetheless possible to carry out a due diligence on the quality and performance of the assets in order to make a sensible, well-informed investment decision.
• Im pact assessment
Due to the urgent nature of the proposal, no impact assessment was carried out. However, the main cost and benefits resulting from the amendments were analysed in a separate staff working document. Moreover, this proposal is based on the two aforementioned EBA documents, the S TS synthetics report and the NPE opinion, both of which analyse in deta il the appropriateness of the proposed amendments and were subject to extensive discussions with stakeholders.
The proposed amendments do not alter the substance of the Regulation and do not therefore impose any additional obligations on businesses.
• Fundamental rights
The proposal is not likely to have a direct impact on the rights provided in the the Charter of Fundamental Rights of the European Union.
4. BUDGETARYIMPLICATIONS
This proposal does not have any budgetary implications.
5. OTHERELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
Since the instrument proposed is a Regulation that is based to a significant extent on existing EU law, there is no need to prepare an implementation plan. By January 2022, the legislative act that is being amended will be subject to a complete evaluation in order to assess, among other things, how effective and efficient it has been in terms of achieving its objectives. The evaluation will be accompanied by a legislative proposal, if appropriate. In that context, the reviewing and reporting requirements would be aligned, if needed.
• Detailed explanation of the specific provisions of the proposal A) Interaction and consistency between elements of the package
This Regulation forms a legislative package with the amendments to the Capital Requirements Regulation. As pointed out by many stakeholders, the development of STS eligibility criteria for balance sheet synthetic securitisation and addressing regulatory obstacles affecting NPE securitisations would not be sufficient on their own to achieve the objective of optimising the role that securitisation can play in the economic recovery. They need to be accompanied by a new prudential treatment, including in the area of capital requirements, better reflecting the specific features of these types of securitisations.
Addressing shortcomings in the regulatory framework for securitisation of non-performing exposures
In order to tackle comprehensively the regulatory shortcomings of NPE securitisation, this proposal puts forward a definition of NPE securitisation, which is aligned with the work of the Basel Committee on Banking Supervision.
NPE securitisations are made subject to a special regime when it comes to fulfilling the risk retention requirement in order to better take account of their special characteristics. Namely, it is proposed that the risk retention requirement is calculated on the basis of the discounted value of the exposures transferred to the securitisation special purpose entity. In addition, the servicer in NPE transaction is allowed to take on the risk retention slice, given its special position in the deal that ensures the alignment of its interests with those of the investors.
The proposal clarifies the verification duties on originators when it comes to securitising non-performing exposures.
Creating a specific framework
for balance-sheet synthetic securitisations
A new Section contains the criteria for Simple, Transparent and Standardised ("STS") balance-sheet synthetic securitisation. As with true-sale STS securitisations, the synthetic STS label should not be understood to mean that the securitisation is risk-free, but rather that the product respects a number of criteria and that a diligent protection seller and buyer, as well as a national competent authority, will be able to analyse the risk involved. The proposed criteria are aligned as much as possible with those for traditional STS securitisation, but they also take into account the specificities of the synthetic product and the different objectives of synthetic securitisations and therefore seek to ensure protection for both originators and investors (as the originator is also an investor in the transaction, retaining the senior tranche).