Shearman & Sterling LLP | FinReg | European Banking Authority Publishes Opinion on Regulatory Treatment of Non-Performing Exposure Securitizations
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  • European Banking Authority Publishes Opinion on Regulatory Treatment of Non-Performing Exposure Securitizations

    10/23/2019
    The European Banking Authority has published an opinion recommending amendments to the regulatory treatment of the securitization of non-performing exposures. The opinion examines how securitizations may be used to fund the reduction of NPEs and outlines regulatory constraints imposed on the use of securitizations in this way, alongside its proposals for amendments to the regulatory framework.
     
    NPEs have been a topic of particular concern since the 2008-2009 financial crisis and ongoing efforts are being made at an EU level to reduce NPE levels at EU banks. The ability to offload NPEs via securitization provides an opportunity for credit institutions to reduce their NPE stocks. However, the EU regulatory regime places constraints on the securitization market that may hinder such activity. The EBA’s opinion considers the following:
     
    Capital Requirements
     
    The EBA has determined that the Capital Requirements Regulation imposes disproportionate capital charges on NPE securitization holdings and caps for securitizations. The EBA recommends that the European Commission reviews the regulatory capital calibration for securitizations under the CRR, including: (i) revising the scope of NPE securitizations; and (ii) implementing an appropriate prudential treatment for mixed pools of securitized exposures, which include performing and non-performing exposures. The EBA also suggests clarification of the caps for NPE securitizations, including how the “expected losses” and “exposure value” should be calculated and how the risk weight should be applied.
     
    Skin in the Game Requirements

    The EBA believes that the Securitization Regulation is leading to compliance difficulties, as the original parties to an NPE must retain an on-going interest in the securitization of no less than 5% of the nominal value of the underlying exposures. The calculation of the nominal value does not take into account the discounted price applied to the NPEs (as a result of their defaulted or likely to default status) and so the retention amount is deemed excessive by the EBA. In addition, the independent servicer of the underlying NPE is not subject to the risk-retention obligation. The EBA suggests that the European Commission considers amending the Securitization Regulation to include a specific risk retention amount calculation method for NPE securitizations and that the independent servicer be entitled to discharge the relevant retention obligation if its interests in the workout of the NPEs are aligned with the bond investors.
     
    View the EBA's Opinion on regulatory treatment of NPE Securitizations.
     
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