Brussels, 09/07/2015 (Agence Europe) - On Tuesday 7 July, the European Banking Authority (EBA) presented recommendations on revitalising the markets for securitised financial products, a priority area of the Capital Markets Union (CMU) project (see EUROPE 11354).
The EBA calls for a “systemic detailed review of the entire regulatory framework” for the technique of securitisation, which allows banks to free up their balance sheets - and therefore their capital requirements - by converting credits (mortgages, consumer credit) into financial securities which are then sold on to investors. This revision should cover capital requirements and other operational rules (retention of securities, due diligence, reporting).
A two-stage approach is recommended to set in place a framework to breathe new life into the securitisation markets. In the first stage, criteria to identify simple, standardised and transparent securitised products would aim to guarantee that the securitisation process does not lead to complexity and additional risks on top of the credit risk. “This process should be fully transparent to investors, should not entail an excessive leveraging effect, should not lead to an excessive conversion of maturities. It should provide appropriate incentives to all parties involved and not replicate the 'originate-to-distribute' model observed in the period which preceded the financial crisis”, the EBA stresses (our translation). During the second stage, criteria would be defined to limit the credit risk of products to be securitised, so that owning a securitised instrument meeting these criteria would lead to lower capital requirements. In this way, the entry of “risky and volatile assets” likely to increase uncertainty and the margin for error in the securitisation process could be avoided, according to the European authority. (Mathieu Bion)