European Banking Authority Consults on Draft Guidelines on Implicit Support in Securitizations

The European Banking Authority published proposed Guidelines on implicit support for securitization transactions (i.e. support provided by a firm where it is not contractually obliged to do so), as required by the Capital Requirements Regulation. Examples of implicit support include purchases of deteriorating credit risk exposures from an underlying pool or improvement of quality of credit enhancements through the addition of higher quality risk exposures. The CRR requires that any reduction in capital requirements gained through a securitization must be justified by a corresponding transfer of risk to third parties. The CRR restricts the provision of implicit support, because it does not result in significant risk transfer to third parties, by requiring firms to hold a minimum of own funds against all of the securitized exposures as if they had not been securitized. A transaction is not considered to provide support if it is executed under arm's length conditions and is taken into account in the assessment of significant risk transfer. The EBA's proposed Guidelines cover what constitutes arm's length conditions and when a transaction is not structured to provide support. For arm's length conditions, an objective test is provided and the assessment must be made having due regard to the information available at the time when the transaction is entered into. The EBA also proposes guidance on the application of the factors for assessing whether a transaction is structured to provide support and when firms should notify their national regulator about the transaction. The draft Guidelines only apply to implicit support. Support provided by a firm under its contractual obligations (explicit support) is addressed under existing EBA guidelines on significant risk transfer. Responses to the consultation are due by April 26, 2016.
 
View the consultation paper.
 
View the EBA Guidelines on Significant Risk Transfer under contractual obligations.