On 12 December 2022, the European Securities Authorities (ESAs) (European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA)) published joint advice in response to the European Commission’s earlier call for advice on the review of the securitisation prudential framework.
The ESAs welcome the current review as an opportunity to assess the performance of the current framework and support the objectives of reviving the EU securitisation market. The targeted proposals in the advice aim at improving the consistency and risk sensitivity of the capital framework for banks whereas the liquidity framework for banks and the prudential framework for (re)insurers should be maintained as it currently stands. However, the ESAs believe that re-calibrating the securitisation prudential framework would not be a solution that in itself would ensure the revival of the securitisation market.
The ESAs make the following recommendations with respect to banks’ capital framework:
- Some technical quick fixes aimed at improving the framework’s consistency and clarity.
- A more substantial, but still targeted, recommendation which recognises the reduced model and agency risk associated with the securitisation originators by reducing the risk weight floor for senior tranches retained by originators under a set of appropriate safeguards. In particular, the recommendation focuses on why this may support further growth in the significant risk transfer market in a prudent manner, by promoting the issuance of resilient securitisations without jeopardising financial stability.
- General issues on the securitisation risk weight formulas that underpin the framework are raised where further work is needed to reach conclusions.
As regards the liquidity framework for banks, the ESAs consider that the current framework should be kept as it currently stands.