National authorities in the European Union will have to submit to binding arbitration if they can’t decide whether to apply the bloc’s new rules on simple securitizations to a transaction, a European Commission document shows.
In the undated draft regulation on creating a framework for simple asset-backed debt, the commission uses the example of two insurers in different countries investing in the same securitized bonds issued in a third EU member state. If the supervisor of one of the insurers agrees the transaction meets the criteria for simple products and qualifies for preferential capital treatment, but the second disagrees, the credibility of the rules might be compromised.
The new rules will allow banks to award a “simple, transparent and standardized” label to asset-backed securities without prior checks by supervisors, and will cut the minimum risk weight on qualifying securitizations by 5 percentage points to 10 percent. The aim is to revive the market for asset-backed debt, allowing banks to boost lending. The ABS push is part of EU plans to strengthen capital markets.
The commission is due to publish the ABS framework on Sept. 30, along with its action plan for a capital markets union.
Where supervisors “cannot come to an agreement, there should be binding mediation,” the draft regulation states. “Persistent use of different approaches could negatively impact the credibility of the STS approach and lead to regulatory arbitrage.”
When a supervisor has evidence that a bank has made “a materially incorrect or misleading STS notification,” it will also be obliged to inform European authorities including the Paris-based European Securities and Markets Authority, as well as national authorities, to discuss the findings.
ESMA will be able to initiate mediation “either on its own initiative where specifically provided for, or upon request by one or more competent authorities in the event of a disagreement.”
Because the market for securitized debt is international, supervisors will be required to share information about their activities and take joint decisions.
“In view of the cross-border nature of the securitization market, cooperation between competent authorities and the ESAs is crucial,” the document states, referring to European Supervisory Authorities. “Information exchange, cooperation in supervisory activities and investigations and coordination of decision-taking is a basic requirement.”