On 8 November 2022, the European Council published a “general approach” for the implementation of the EU Banking Package. This concerns the final implementation of the Basel III regulations, which will essentially be carried out via the adjustments to the Capital Requirement Regulation (CRR) and Capital Requirement Directive (CRD). The European Council essentially follows the draft of the European Commission. In addition, the Council follows the proposal to implement the final implementation only on 1 January 2025.
Significance for the securitisation sector
The introduction of CRR III is essential for the securitisation sector. The central change in CRR III is the introduction of an output floor. This is not specified separately for securitisations and therefore the general regulations must still be observed here. Institutions with an internal model approach must set the capital requirements at at least 75% of the SEC-SA approach. It follows that initially all institutions with an internal model must additionally calculate the SEC-SA. The output floor will probably pose substantial problems for securitisations of corporate loans in particular, as the calibration for securitisations is very conservative overall. This is due in particular to the p-factor as the relevant variable for calculating capital requirements under the SEC-SA (see also news of 7 November 2022 on the open letter to the European Commission). The output floor is not to be fully applied until 2030 due to a transitional arrangement.
Study by AFME and Risk Control
A study by Risk Control on behalf of AFME examines the impact of the output floor on capital requirements for securitisations. The results of the study support the above-mentioned concerns of the planned adjustments of CRR III for securitisations of corporate loans. However, the study also concludes that the changes in CRR III could have a positive impact on the asset classes residential mortgages and other retail loan portfolios.
Conclusion
From the point of view of the securitisation market, it is to be hoped that the review of the CRR and LCR by the European Commission as part of the Call for Advice on the securitisation regulation (see news article of 18 October 2021) will lead to the right conclusions. An adjustment of the inappropriately conservative capital requirements for securitisations would be desirable. As already addressed in the above-mentioned open letter to the European Commission, an appropriate adjustment of the regulatory framework for securitisation is currently more than ever of substantial importance for the European financial market. The introduction of CRR III will further affect the securitisation market and make refinancing more difficult for large parts of the SME sector, especially in connection with investments in the sustainable transformation.