The Basel Committee on Banking Supervision published criteria to help investors assess the risk of asset-backed securities, holding out the promise of easing capital requirements on qualifying products.
Securitizations seeking the “simple, transparent and comparable” label should pool similar assets in a way that isn’t overly complex, the Basel group and the International Organization of Securities Commissions said in a statement on July 23. They should set out information on the assets underlying the deal, its structure and the parties involved.
The Basel committee increased capital requirements on asset-backed securities in December from pre-crisis levels as part of a revised securitization framework that comes into effect in 2018. While Thursday’s criteria on simple products aren’t “a prescription for regulatory action,” the regulator said it’s looking at how they can be incorporated into the framework.
“I would expect qualifying securities to receive better capital treatment than those that don’t qualify,” Jean-David Cirotteau, head of covered bond strategy at Societe Generale SA in Paris, said by telephone. “Regulators understand the advantages, that securitization is a necessary tool for banks to fund themselves, to transfer risk and to continue to distribute credit to support growth.”
Complex securitizations helped fuel the financial crisis by making it harder for investors and supervisors to understand cash flows and where risks were hidden. The crisis also underlined the importance of strong underwriting in originating the underlying assets and of governance, as well as the importance of giving buyers the tools to carry out their own assessment of the risks, rather than relying on ratings.
The draft criteria for simple, transparent and comparable securities proposed in December gave rise to industry concerns that they were “too prescriptive and granular.” The final standards were adjusted “to strike the right balance in the level of detail for global criteria that can be applied to all asset types and across jurisdictions,” the regulators said.
In the European Union, the European Central Bank and other policy makers are seeking to rebuild the market for ABS as a way to reinvigorate lending and investment in the bloc. The European Commission, the EU’s executive arm, said the Basel capital rules for ABS would significantly increase requirements even for highly rated products and should be reviewed.
The European market for ABS was brought close to extinction in the financial crisis, and it has been slow to recover, even after the ECB began purchasing the securities last year. Issuance in 2014 amounted to 216 billion euros ($238 billion), down from a high of 819 billion euros in 2008, according to data from the Association for Financial Markets in Europe.
Capital requirements will probably be set at different levels for securities with the STC label and for the rest, according to PCS, a not-for-profit ABS market group.
“This is the approach being introduced in the European Union,” PCS said on its website. This approach “may well become the new global framework for securitization regulation,” the group said.
The European Banking Authority recommended last month that “capital charges foreseen by the 2014 Basel securitization framework can be lowered” for simple, standard and transparent products “to reflect their relative lower riskiness.” The EBA published technical advice on criteria for identifying qualifying securitizations.
While the ECB and the Bank of England have encouraged the creation of the STC label because it may help ease capital requirements on underwriters of the securities, buyers are still penalized, said Erik Parker, an asset-backed securities strategist at Nomura Holdings Inc. in London.
“It needs to be economic for arrangers to issue and for buyers to buy and there’s nothing concrete on that as yet,” he said. “Currently it’s extremely penal for insurers to hold ABS, so they aren’t focused on the market.”