European Banking Authority Consults on Significant Risk Transfer in Securitization

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The European Banking Authority has published a Discussion Paper on significant risk transfer in securitization, seeking views on proposals to strengthen the regulatory and supervisory framework of significant risk transfer. The EBA's proposals are based on the newly agreed European securitization framework, comprising the Securitization Regulation and amendments to the Capital Requirements Regulation, which is due to come into effect in 2018. The Securitization Regulation includes new requirements on risk retention, due diligence, transparency and a new regime for simple, transparent and standardized securitizations (known as STS securitizations). STS securitizations will provide preferential regulatory capital treatment for investors, in particular, for bank investors through the related CRR amendments.

The EBA is proposing to strengthen the supervisory treatment of structural features used in securitizations that may impede the ability of originators to meet the SRT requirements on a continuous basis. The structural features are those that are not covered in the EBA's 2014 Guidelines on SRT for securitization - amortization structure, call options, excess spread and synthetic securitization. The EBA proposes a set of safeguards for each structural feature and a requirement that originators submit a risk transfer self-assessment to the national regulator when submitting their SRT notification.

A further proposal is to improve the assessment of commensurate risk transfer by adopting one of two options: (i) enhancing the existing tests through introducing a new requirement on the minimum thickness of the first loss tranche and introducing a test of commensurate risk transfer; or (ii) supplementing or replacing the existing tests with a comprehensive new test which tests both SRT and commensurate risk transfer.

In addition, the Discussion Paper considers existing market practices of transfer for the non-performing loans and seeks views on the proposed regulatory treatment of NPL securitization. The EBA is also proposing to standardize the process of SRT assessment by national regulators in relation to the originator's notification of SRT as well as the regulator's response.

The EBA is requesting responses to the consultation by December 19, 2017. The feedback will go towards the EBA's final technical advice to the European Commission on the issue.

View the EBA's Discussion Paper.

View the EBA's Guidelines on SRT for Securitization.

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