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Fitch: Basel, CMU Will Shape European Securitisation Market
March 7, 2017 / 10:11 AM / 9 months ago

Fitch: Basel, CMU Will Shape European Securitisation Market

(The following statement was released by the rating agency) LONDON, March 07 (Fitch) The final shape of the "Basel IV" risk-weighted asset and leverage ratio reforms and the EU's Capital Markets Union proposals will be important determinants of the size and nature of the European structured finance market, Fitch Ratings says. EU banks' use of publicly placed true-sale securitisation for regulatory relief could become a key tool for optimising regulatory treatment even as its use as a funding tool is waning, but only if the investor base is sufficient. The timing and outcome of both reforms are uncertain. A lack of international consensus about the use of internal models is delaying agreement on RWA and leverage ratio reforms by the Basel Committee. Meanwhile, in a speech last Tuesday European Commission Vice-President Valdis Dombrovskis said that ongoing discussions about boosting securitisation "to finance the EU recovery... cannot wait much longer." Basel IV could ultimately spark more securitisation issuance by EU banks. The Committee may derecognise "true-sale" securitised asset portfolios for leverage ratio calculations, while imposing a permanent capital floor that limits the benefit of using internal models for regulatory capital purposes. Banks would then have an incentive to securitise low-margin portfolios that become uneconomical due to higher risk-weighted requirements, while reducing leverage ratio exposure. EU banks are more constrained by leverage ratios than US peers due to the European reliance on modelled RWAs, which are balance-sheet intensive. But EU banks' motivation to use publicly placed securitisation for funding rather than regulatory relief is limited. Dombrovskis's comments appear directed at last year's conclusion by the European Parliament that the European Commission's proposed 5% risk retention rules were too loose for securitisation issuers. An increase in the risk-retention requirement to 10% or possibly higher for some deals would make funding via securitisation even less cost effective for banks relative to other post-crisis funding sources, such as central bank funding. Covered bonds also appear a more attractive source of secured bank funding than securitisation due to their lower cost of funding and less onerous governance requirements for issuer and investor. Much of the current pipeline for public EU securitisations is instead driven by non-bank portfolio owners that have purchased the assets from banks or originated their own in competition with banks. This is in line with the Capital Markets Union aim of reducing the reliance on banks to fund the real economy. But European regulation may limit investor appetite. The European Parliament has promoted a requirement to disclose securitisation holdings on a central register. Anecdotal evidence from investors suggests that some are already dissuaded from securitisations by compliance and due-diligence hurdles, and regulatory uncertainty may be further dampening appetite. Meanwhile, insurance investors prefer to buy or originate whole loan portfolios for themselves, where previously they may have invested in securitisation paper that now requires disadvantageous capital holdings under Solvency II rules. <a href="">2017 Outlook: EMEA Structured Finance Contact: Andrew Currie Managing Director, Structured Finance +44 203 530 1447 Fitch Ratings Limited 30 North Colonnade London E14 5GN Monsur Hussain Senior Director, Financial Institutions +44 20 3530 1793 Mark Brown Senior Analyst, Fitch Wire +44 203 530 1588 (Disclosure Statement): The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. 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