Simple, transparent and standardised securitisation: is it possible?

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In an effort to revive securitisation markets, the European Commission proposed a special ‘STS’ label and related capital charge reductions. The criteria stipulate: i) simplicity, i.e. the loans must be bundled and transferred to a special purpose entity (SPE); ii) transparency, i.e. the data regarding the performance of the underlying assets must be readily available to investors and updated on a regular basis; and iii) standardisation, i.e. the financial management must follow generally accepted practices. However, the proposal does not harmonise the national rules for SPEs, nor does it tackle the differences in national insolvency laws, which affect the claims on the underlying assets.

On the supervisory side, notification of STS products should go to ESMA, which publishes the information on its website. Market participants indicated that the market performance in European asset-backed securities has been very good so far. Also, that there had been hardly any defaults in the aftermath of the crisis. In addition, they argued that the current capital charges are too high today in proportion to the risk incurred. Banks consider securitisation as a vital funding tool that can help free up their balance sheets and allow them to lend more to households and businesses. Institutional investors stressed that it allows them to achieve the desired portfolio diversification and exposure to consumers and SMEs. Opponents explained that the proposal will not remove the complexities of these securitised products. Most likely, it will increase interconnectedness, pro-cyclicality and leverage in the financial system, rather than create diversity or contribute to financial stability. In their view, the risk retention should be much higher, at 20% instead of 5%. The latter element was retained in the European Parliament’s initial report on the proposal, together with an enhanced role for ESMA in the European Securitisation Data Repository, a single reporting entity for all STS instruments.