The Bank of England says it supports lower capital requirements for investors in high quality securitisations.
Speaking at the Global ABS conference in Barcelona this week, the Bank’s director of prudential policy David Rule said there was “a case for some lowering of capital requirements for ‘STC’ transactions on the grounds of lower structure risk.”
Rule made the comment in a speech that reiterated the Bank’s backing for the EU’s move to legislate what is a “simple, transparent and comparable” (STC) securitisation.
Investors, issuers and regulators would be helped by having a single set of criteria defining an STC in European legislation, said Rule. “I believe the intention is that they will then be applied consistently across different sectors – for example, banks, insurers and funds – and different regulations – for example capital and liquidity.”
For regulators, “setting risk sensitive capital requirements for securitisation tranches is challenging,” Rule noted. “In our view, including a differentiation based on STC in that capital calculation helps to capture other important dimensions of risk related to structure, transparency and governance.”
Last December, the Basel capital rules for banks’ holdings of securitisations were revised, more than doubling the requirement to at least 15% of the value; this higher risk-weighting is due to take effect in January 2018. Rule said the Bank thought this calibration was “broadly right”, but as cited above, indicated support for lower capital requirements for banks on STC deals.
“A stronger argument can be made that Solvency 2 standardised capital requirements for EU insurers are still too high, especially at longer maturities,” he said.
Rule also highlighted the lower capital requirements that currently apply to covered bonds. “We would support moves to put securitisation and covered bonds on a more level playing field,” he said.
“A uniform set of criteria for STC securitisation can play an essential role in de-stigmatising European securitisation, helping the market to develop on a sustainable track and attracting a broader investor base.”
“An STC securitisation should meet the ‘What You See Is What You Get’ principle. The structure should not have hidden traps or complications, allowing investors to focus on analysing the credit quality of the underlying assets,” Rule said.