The European Union is proposing rules that would make it easier for banks to sell off mortgages and reduce by half the amount of capital they must hold against certain bundled loans they keep on their books, according to documents seen by Bloomberg.
The EU is due to announce plans to overhaul the bloc's securitization market next month, after lengthy discussions with industry players and other stakeholders. In a
The initiative is part of the EU's broader Savings and Investment Union, which aims to channel the bloc's financial firepower more efficiently and spur growth by funding key industries including the defense sector.
Restrictive regulations have long been blamed for holding back Europe's market for bundling mortgages, car loans, credit card debt and other types of borrowing into financial products. The draft proposals seen by Bloomberg include what officials describe as "targeted changes" to the existing rules "to make them more risk sensitive" and address other shortcomings.
The proposals reduce the minimum risk weightings for the safer parts of a security proportional to the riskiness of the underlying exposure, according to the documents. That would make it more efficient for banks to securitize less-risky assets like mortgages, since banks holding that debt would be subject to lower capital charges compared with the current regime.
The European Commission's proposal reduces the existing floors used for "resilient" senior tranches from 10% to 5% for so-called STS transactions and from 15% to 10% for non-STS deals. For other senior positions that aren't considered resilient, the floor for capital charges will also be reduced to 7% and 12%.
Simple, Transparent and Standardized, or STS, is a framework that sets criteria for the disclosure and reporting of securitizations, in exchange for better regulatory treatment.
SRT rules
Other changes include adjustments to the so-called P factor, which is used when calculating capital requirements, and was deemed "excessively high and lead to unjustified levels of overcapitalisation for some securitization transactions," according to the EU proposals. They also include broadening the eligibility of securitizations for banks' liquidity buffers.
Officials are seeking a "more consistent and predictable" framework for
European lenders have complained about holdups in getting the deals approved, and the EU documents propose using a "Principle-Based Approach test" to replace existing mechanical tests.
The EU is planning a self-assessment that the originator should submit to supervisors to demonstrate a significant risk transfer has been met and also plans to reduce the reporting requirements for issuers and investors on the deals.
