On 27 June 2023, the European Parliament and Council agreed on the EU banking package and thus completed the final implementation of the Basel III requirements in the EU. We have already reported on the essential changes in the course of the announcement (see TSI kompakt of 28 June 2023). We now have detailed information on the contents of the banking package. We would therefore like to take the opportunity to report in more detail on the regulatory changes in the CRR III in connection with securitisations.
The Adjustments:
- Own funds requirements
For the calculation of the output floor, the expected exception to halve the non-neutrality factor was included in the CRR for securitisations (Boyer proposal). Specifically, this means that the p-factors in the calculation of the output floor can be reduced (i) to 0.25 for STS securitisations and (ii) to 0.5 for non-STS securitisations. - Furthermore, an article has been included which deals with the analysis of the effects of the output floor on the risk sensitivity of securitisations. In this context, the appropriateness of the p-factor shall be examined in principle and a recalibration is to be discussed against the background of the good historical performance of European securitisations and the reduced agency risks. The report is to be prepared by the EBA in close cooperation with ESMA, taking into account the Basel requirements, by December 2027. Furthermore, an article has been included which deals with the analysis of the effects of the output floor on the risk sensitivity of securitisations. In this context, the appropriateness of the p-factor shall be examined in principle and a recalibration is to be discussed against the background of the good historical performance of European securitisations and the reduced agency risks. The report is to be prepared by the EBA in close cooperation with ESMA, taking into account the Basel requirements, by December 2027.
- Shadow banking regulation
The CRR III contains a new definition of “shadow banking entity”: “An entity that carries out banking activities outside the regulated framework”. According to the current interpretation, securitisations do not fall under this definition. The introduction of an upper limit for shadow banking exposures, similar to the large exposure limit, has also been postponed for the time being: A proposal on how shadow bank exposures are to be limited in the future shall be developed by 31 December 2028. - ESG
As announced by the European Commission, the additions in the area of ESG are very extensive in CRR III; a more detailed description would be too far-reaching in the context of this news article. Regulations specifically related to securitisations are not included. Overall, EU Parliament and Council are aiming for an expansion but also harmonisation of the ESG regulations. - NPL reduction
From the introduction of CRR III, the EU Commission shall regularly review the share of defaulted exposures as well as the development of asset quality in bank’s balance sheets. In this context, the secondary markets for the sale of NPLs and explicitly the regulatory developments for securitisations shall be considered. - Portfolio guarantees
Two years after the introduction of CRR III, the EBA is to prepare a report on the regulatory treatment of capped or floored unfunded credit protection – including securitisations.
- Phasing-in of the output floor
The output floor will be phased-in as expected:- 50% from 1 January 2025 to 31 December 2025
- 55% from 1 January 2026 to 31 December 2026
- 60 % from 1 January 2027 to 31 December 2027
- 65% from 1 January 2028 to 31 December 2028
- 70% from 1 January 2029 to 31 December 2029
- 100% from 1 January 2030.
Conclusion
Although most of the innovations in the CRR III were already expected, they nevertheless contain positive signals for the securitisation market: With the commissioning of the analysis of the p-factor for securitisation, the opportunity for a fundamental revision of the capital requirements is now officially fixed in a Level I text. Moreover, it is noticeable that securitisation is also explicitly mentioned in connection with other important funding issues for banks (NPLs).
This raises hope that, in addition to the very welcome and important, but still rather limited, inclusion of the Boyer proposal, major revisions of the very conservative regulation of securitisation will take place in the medium term. This could be an important step towards developing the market potential of securitisations more strongly in the future.