Securitisation Regulation - STS and NPE amendments

On 24 July 2020, the European Commission published a legislative proposal for a regulation to amend the Securitisation Regulation (the SR Amendment Proposal) in order to promote the use of securitisation in financing SME lending. The proposal was combined with the publication of a separate legislative proposal for a regulation to amend the Capital Requirements Regulation (the CRR Amendment Proposal) in relation to adjusting the securitisation framework to support the economic recovery from the effects of Covid-19. Although the securitisation framework is due for review in 2022, the onset of the crisis triggered by Covid-19 has prompted the European Commission to bring forward these measures in large part to tackle access to funding for SMEs.

The changes to the Securitisation Regulation expand the simple, transparent and standardised (STS) framework to include on-balance sheet synthetic securitisation. Whilst the effects of Covid-19 on the economies of the European Union might have been the immediate catalyst for this expansion, the change was already expected after the publication in May of the final EBA report on this topic, as discussed here. Consistent with that report, arbitrage synthetic securitisations will remain excluded from STS.

In addition to the STS changes mentioned above, the SR Amendment Proposal includes amendments designed to facilitate the securitisation of non-performing loans (or “non-performing exposures” / “NPE” as referred to in the SR Amendment Proposal). In particular, the proposal seeks to amend the risk retention and credit granting requirements of the Securitisation Regulation to align them better with the structure of NPE securitisations and the parties to a NPE securitisation as compared to other securitisations.

The CRR Amendment Proposal contains changes designed to make the prudential regime for STS on-balance sheet synthetic securitisations and NPE securitisations more risk sensitive. In particular, the senior tranche of STS on-balance sheet synthetic securitisations would receive beneficial capital treatment and NPE securitisations would benefit from a 100% risk weight for senior tranches of traditional (i.e. “true sale”) securitisations and a floor of 100% to the risk weights of other tranches of both traditional and on-balance sheet synthetic NPE securitisations that are subject to the general framework for calculation of risk weights.

Alongside these proposals, the European Commission has published Q&A setting these proposals in the context of its Covid-19 recovery efforts as part of the Capital Markets Union. The expectation is that SMEs will benefit both in relation to the increased use of both synthetic securitisation of SME loans and NPE securitisation of SME loans (and other asset classes) to free up banks’ balance sheets for additional lending to SMEs.  A number of other measures are to be adopted in connection with the above proposals including amendments to the Prospectus Regulation and MiFID II.

The European Parliament and the Council of the EU will now move to agree the legislative texts and, once adopted and entered into force, the changes will apply directly in member states.