FEDERATION -°»,

Associazione
ABI Bancaria LEINE; verband BANCAIRE
Italiana N

FRANCAISE

Herrn Parlamentarischen Staatssekretär
Dr. Florian Toncar, MdB
Bundesministerium der Finanzen
Wilhelmstraße 97

10117 Berlin

Deutschland

Fostering the European securitisation market

Joint proposal by the Dutch, French, German and Italian
banking federations

Dear Mr Toncar,

The completion of capital markets union (CMU) is one of the central
elements on the European agenda and securitisation is key to the
CMU. Securitisation would enable greater involvement of the
capital markets in the major financing challenges of our time. It
should thus be given an important role in the post-Covid recovery
toolkit for unlocking the significant amounts of capital that are
much needed to finance the real economy, the fight against climate
change! and the digital transformation.? Furthermore, it will enable
private risk sharing across the EU and thus contribute to financial
stability.

A variety of transactions, from the bundling of small-scale green
loans (e.g. for solar panels) to on-balance sheet (i.e. non-arbitrage)
“synthetic” securitisation and traditional “cash” securitisation of
corporate, SME, consumer, mortgage or auto loans, illustrate the
potential of securitisation to build a bridge between bank-driven
financing in Europe? and the resources of the capital markets.
Furthermore, trusted publicly owned institutions like the European
Investment Bank are invested and involved in securitisation linked
to SME financing. This is another good example of how
securitisation can be used to facilitate and catalyse lending also to
SMESs and small mid-caps.

! Funding needs are estimated at around €330 billion/year (ECB) to €350 billion/year (European
Commission) for at least 10 years.

2 €125 billion/year (source: ECB) for at least 10 years

3 68% of private sector debt in the EU is made up of bank loans, whereas only 15% of private
debt remains on banks’ balance-sheet in the US.

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#8
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Telephone:

@abi.it

Telephone: ı
u @bdb.de

Telephone:

@fbf.fr

Telephone:
@nvb.nl

4 May 2022

Prepared by fk

However, the EU securitisation market never recovered after the global financial crisis,
with annual issuance declining from around 400bn euros pre-crisis to a range of 80-130bn
euros since 2008.* While the High-Level Forum (HLF) on Capital Markets Union has identified
securitisation and its promotion as a key element in creating capital markets union, the term
“securitisation” still triggers negative associations with the 2008 financial crisis among the
general public. This is not justified, since the performance of EU securitisations has
always been strong, even during the financial crisis, especially compared to the US
securitisation market. Furthermore, the Securitisation Regulation adopted in 2017
additionally banned the kind of risky business models that accelerated the financial crisis in the
US.

We need to foster the European securitisation market by recalibrating the regulatory
framework, which is too conservative and generally too complex. To achieve this the
Commission should present a proposal, by the end of 2022 at the latest, that fully implements
the recommendations of the HLF.

Therefore we welcome the fact that the Commission already reflects the recommendations of
the HLF in its call for advice (CfA) regarding the CRR in relation to the capital and liquidity
treatment of securitisations. The ESAs are currently preparing their answer to the CfA and in
our view the involvement of national supervisors and market participants should be key.
Furthermore, we agree with ESMA that there is a need to amend the disclosure requirements in
the Securitisation Regulation itself and that a mere change of level 2 standards would not
suffice.

Since the review will take some time, we kindly ask you to support the idea of fostering
securitisation in the meantime with a targeted transitional arrangement by lowering the so-
called p factor and thus the risk weights of senior securitisation tranches in the context of the
Banking Package 2021 (please see annex for further information).

We have outlined what we consider to be the most important means of promoting the
securitisation market in an annex to this letter and would be happy to discuss them with you.

Yours sincerely,

4 Issuance in 2020: 194.7bn euros in the EU and 3354.9bn euros in the US. Comparing private securitisation in the US with placed
securitisation in Europe, the volume gap is between x3 to x6 across the last 8 years.

5 For example, EU residential mortgage-backed securities (RMBS) showed much lower loss rates (0.1% of cases at the height ofthe
crisis) than US RMBS with the same rating, whose loss rates, at 16%, were many times higher than in the EU.

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Annex: Specific proposals

Basel IV - Banking Package 2021:

We are concerned that the output floor proposed in the Banking Package 2021, which would
also affect securitisation, would - due to the very conservative calibration of securitisation risk
weights - have an especially adverse effect on low-risk senior securitisation tranches.
Therefore we suggest mitigating this negative impact by at.least halving the so-called p
factor in the securitisation standardised approach (SEC-SA). This would partially offset the
negative impact of the output floor. The idea could be implemented as a transitional
arrangement, which should stay in place until the review of the securitisation framework is in
force and a proper recalibration of all approaches is made, not only the SEC-SA but above all
the SEC-IRBA.

Review of the Securitisation Framework:

Thanks, among other things, to the very valuable work of the HLF on the CMU established by
the Commission in 2020, practical recommendations to unlock the EU securitisation market are
well-known:
-  Recalibrate capital charges and floors on senior tranches, in line with their low-risk
profile.
-  Provide a clearer, more predictable and faster significant risk transfer (SRT) assessment
process.
- Upgrade the eligibility of senior STS tranches as HQLA in the LCR ratio and re-include
also non-STS ones.
-  Differentiate between disclosure requirements for public and private securitisation
transactions.

BE Recalibrate capital charges (p factor) and floors on senior tranches

= After securitisation, total risk-weighted assets associated with a loan portfolio often reach
more than twice their pre-securitisation amount, which makes the securitisation simply
uneconomical. This “non-neutrality” was intentionally introduced by a so-called p factor
in both internal (SEC-IRBA) and standardised models (SEC-SA). In practice, risk-based
capital charges are multiplied by (1+p), resulting in a mechanical increase in capital
charges compared to a purely risk-based approach. In addition, floors have been
introduced on senior tranches at a level significantly higher than that which their actual
risk justifies. In order to ensure consistency with the impact of a lower p factor and lower
floor on the SEC-IRBA and SEC-SA, the external ratings-based approach (SEC-ERBA)
should be recalibrated accordingly.

= There is consensus among stakeholders, also reflected in the final report of the HLF, that
the capital treatment of Solvency II limits - or in some cases even prevents -
investment by insurers. Junior positions are then purchased only by a very limited

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number of sophisticated hedge funds, mostly non-EU based, making the market
concentrated and capital relief transactions very expensive for banks.

= Provide a more predictable and faster significant risk transfer (SRT) assessment
process

The prudential framework gives the competent authority responsibility for assessing the
“significant risk transfer” for each transaction issued as a pre-condition for the bank
obtaining any capital relief from the tränsaction. However, the criteria and process used
by competent authorities to assess the “commensurateness” of the risk transfer have
created a significant burden and unpredictability and need to be streamlined. Only after
the assessment do originators know whether or not their transaction meets the conditions
or whether contractual modifications are needed. In the experience of the industry some
of the characteristics of the transactions, such as market prices, can change within that
period. This is a significant constraint as those factors are taken into consideration by the
supervisor in its assessment. In the worst case, this means that the transaction fails the
assessment and needs to be stopped or executed without any capital relief. Another
problem related to SRT is the lack of harmonisation and clarity as to how discretion is
exercised. Consequently, more harmonisation of the SRT process and stronger dialogue
between the industry and regulators like the EBA and ESMA is needed to reduce
uncertainty and make the process more predictable.

= Upgrade the eligibility of senior STS tranches as HQLA in the LCR ratio

= We consider the current treatment of securitisations in the liquidity coverage ratio rather
penalising and not reflective of the actual characteristics of highly rated securitisations.
To make it easier for banks to hold securitisations and to make securitisations more
attractive, we propose aligning the regulatory treatment of securitisation tranches in the
liquidity framework with that of covered bonds. The current treatment of securitisation
does not sufficiently recognise improvements in the regulatory framework or the
performance of securitisations during the 2008/2009 financial crisis compared to that of
similar asset classes. Consequently, as a first step, senior STS tranches with an AA-
rating (equivalent to what applies to covered bonds) should be allowed to be treated as
high quality liquid assets of the highest level (1) and those tranches should be included in
the liquidity coverage ratio (LCR) with haircuts similar to those that apply to covered
bonds. The calibration of the eligibility criteria for level 2A and 2B should be conducted in
a similar fashion. In a second step, consideration could also be given to extending the
HQLA eligibility to a broader set of tranches, i.e. tranches with a BBB- rating, if supported
by quantitative evidence or increasing their level to 1 under certain specific circumstances
in line with what applies to covered bonds,

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m Adjust the transparency requirements in Article 7 of the Securitisation Regulation

(Regulation 2017/2402)

= Private securitisation market participants try to fill ESMA templates adequately, but the
information they contain is not really used in practice by investors to detect, assess and
monitor risks so this is considered an unnecessary and costly burden.
In the private securitisation business, investors (often banks) contractually agree with
their clients/originators on what information is necessary to monitor their securitisation
transactions. Most importantly, the type of information required by private investors to
assess the risk they are taking on is not necessarily aligned with both the content and
format of ESMA reports. For instance, the reporting required by private investors needs
to be aligned with the way the eligibility criteria, concentration limits and performance
tests and specific covenants are defined in each transaction. This means that each
reporting is “tailor-made” to reflect the specificity of each deal. The “one-size fits all”
approach of the ESMA template is useful for the public market but not fit for this purpose.

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