Response to consultation paper on draft RTS on the homogeneity of the underlying exposures in STS securitisation
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The underwriting and risk process includes risk assessment as well as monitoring and work-out. It will thereby achieve the intention of allowing homogenously underwritten and managed enterprises to be categorised under either retail (individuals and enterprises) (iii) or corporates (iv).
The French stakeholders wonder how should the amendment being interpreted should the pool of underlying assets includes enterprises and SME corporates belonging to the same sector of activity (leasing to SMEs and entrepreneurs for instance)?
- Firstly, using solely a simplistic 500m€ criterion would not be suited to actual procedures for risk assessment and credit underwriting homogeneity of the pools.
- Secondly, this [arbitrary] criterion would result in lower granularity and therefore less diversification.
- Thirdly, this criterion does not reflect current market practices and would unnecessarily reduce the scope of transactions eligible to the STS label.
Specially after considering the granularity criterion of 2% max and other criteria used for portfolio selection.
- Fourthly, the CRR III large corporate definition has not been validated and even less implemented. Thus, relying on this concept also seems highly premature.
- Lastly the most likely outcome of EBA’s proposal would be to exclude exposures to “large corporates” (as defined in CRR3) from synthetic securitisation programs, while (possibly) no program specifically dedicated to “large corporates” could be launched, due to the insufficient depth of the pool of eligible transactions. This outcome would not be in originators’ interest, nor in investors’.
We therefore suggest an alternative criterion instead of the “sales >EUR500m” one: the use of the same risk assessment (PD) policy by the originators. Such criterion, in our view, would truly reflect current market practices. It would also meet all the policy objectives set out in the consultation paper: it would define a homogeneous asset type, facilitate robust due diligence by investors, and entail no additional costs to originators.
As a reminder, originators’ risk assessment (PD) policies are validated by regulators/supervisors, who ensure that they apply to a homogeneous type of counterparties: therefore, the existence of a validated risk assessment (PD) policy, by itself, demonstrates the homogeneity of the counterparties to which it applies.
large corporates: same comments as for question 2
We believe that the grandfathering provisions should apply not only to outstanding STS ABCP and STS non-ABCP securitisations but also to outstanding STS on-balance sheet securitisations.
And more specifically:
- Granularity criteria or maximum % per bucket (for instance individual concentration percentage) might be considered, as banks effectively employ both portfolio strategies and there is pressure coming from the JST for less concentrated pools
- An amendment should be made to Article 1(c) of the original RTS, as there is no SSPE in synthetic format
- The original RTS for exposures under Article 1(iii) credit facilities or (vii) trade receivables, need to meet Article 1.(d) “one or more” homogeneity factors in Article 2, however there are no homogeneity factors in Article 2 for these asset types
- It might be desirable to clarify where Project Finance could fall, i.e. under either Article 1(a)(viii) ‘other exposures’ or amended Article 1(a)(iv) ‘any type of enterprise or corporation’, again whatever size.
Please refer to our earlier comments. We believe it is not a good idea to create an extra category of “large corporates” by relying on a “sales >EUR500m” criterion, as it would exclude “large corporates” from synthetic securitisation transactions, while making it very unlikely to reach a “critical mass” of “large corporates” exposures to launch securitisation programs dedicated to this newly created asset type.
Besides, - Would split between large corporates and SME obligor types remain based on consolidated revenues size and not on underwriting and risk management principles, banks having no "large corporates" (CIB-type) activity will have to securitise separately their portfolios of loans to SMEs which belong - or not - to groups with annual sales > 500mln EUR, making securitisation much more difficult because of the limited size of their lending portfolio, and forcing them to retain concentrations that would otherwise be mitigated by securitisation of mixed pools.
- Would grandfathering not be applicable to STS synthetic securitisations executed after approval of the new STS framework, some STS deals will lose their STS status after one year and affect the amount of capital relief on these deals. This might ultimately trigger multiple regulatory calls (and therefore loss of protection for the affected banks). It makes no sense to provide for only one year of grandfathering on existing transactions that were structured before the rules even existed. We ask here for a level playing field with traditional STS securitisations, and implementation dates aligned with CRR3 implementation.
Q1: Do you agree with the proposed amendment to the asset category in Article 1 with respect to the addition of “credit facilities provided to enterprises, where the originator applies the same credit risk assessment approach as for individuals not covered under points (i), (ii) and (iv) to (viii)”? Please elaborate on the practical relevance.
We do agree on the principle. We believe that homogeneity in risk assessment and credit underwriting procedures should be the key factor to be considered in homogeneity determination of a securitised portfolio.The underwriting and risk process includes risk assessment as well as monitoring and work-out. It will thereby achieve the intention of allowing homogenously underwritten and managed enterprises to be categorised under either retail (individuals and enterprises) (iii) or corporates (iv).
The French stakeholders wonder how should the amendment being interpreted should the pool of underlying assets includes enterprises and SME corporates belonging to the same sector of activity (leasing to SMEs and entrepreneurs for instance)?
Q2: Do you agree with the proposed amendment in Article 1 to the “type of obligor” for credit facilities, including loans and leases, provided to any type of enterprise or corporation?
Even though we concur to the objective aimed by the EBA to define distinct types of obligors to which similar risk assessment and credit underwriting principles apply and we understand the alignment of definition for consistency reasons, we do not agree with the proposed amendment for the following reasons:- Firstly, using solely a simplistic 500m€ criterion would not be suited to actual procedures for risk assessment and credit underwriting homogeneity of the pools.
- Secondly, this [arbitrary] criterion would result in lower granularity and therefore less diversification.
- Thirdly, this criterion does not reflect current market practices and would unnecessarily reduce the scope of transactions eligible to the STS label.
Specially after considering the granularity criterion of 2% max and other criteria used for portfolio selection.
- Fourthly, the CRR III large corporate definition has not been validated and even less implemented. Thus, relying on this concept also seems highly premature.
- Lastly the most likely outcome of EBA’s proposal would be to exclude exposures to “large corporates” (as defined in CRR3) from synthetic securitisation programs, while (possibly) no program specifically dedicated to “large corporates” could be launched, due to the insufficient depth of the pool of eligible transactions. This outcome would not be in originators’ interest, nor in investors’.
We therefore suggest an alternative criterion instead of the “sales >EUR500m” one: the use of the same risk assessment (PD) policy by the originators. Such criterion, in our view, would truly reflect current market practices. It would also meet all the policy objectives set out in the consultation paper: it would define a homogeneous asset type, facilitate robust due diligence by investors, and entail no additional costs to originators.
As a reminder, originators’ risk assessment (PD) policies are validated by regulators/supervisors, who ensure that they apply to a homogeneous type of counterparties: therefore, the existence of a validated risk assessment (PD) policy, by itself, demonstrates the homogeneity of the counterparties to which it applies.
Q3: Do you agree with the proposed amendment in Article 1 to the “type of obligor” for auto loans and leases?
individuals: no objection.large corporates: same comments as for question 2
Q4: Do you agree with the proposed amendment in Article 1 to the “type of obligor” for credit card receivables?
Not applicableQ5: Do you see the need for the grandfathering provisions in Article 2 for the outstanding STS ABCP and STS non-ABCP securitisations? If yes, please elaborate.
Yes, we believe that the grandfathering provision is very important in substance and as a matter of principle.Q6: Do you agree with the deferred application date in Article 2 for the outstanding STS on-balance-sheet securitisations?
No, we disagree with this provision.We believe that the grandfathering provisions should apply not only to outstanding STS ABCP and STS non-ABCP securitisations but also to outstanding STS on-balance sheet securitisations.
Q7: Are there any aspects that should be considered with regard to the homogeneity of the STS on-balance-sheet securitisations which are not specified in these RTS?
On a general perspective, please refer to our earlier comments. We believe it is not a good idea to create an extra category of “large corporates” by relying on a “sales >EUR500m” criterion, as it would exclude “large corporates” from synthetic securitisation transactions, while making it very unlikely to reach a critical mass of “large corporates” exposures to launch securitisation programs dedicated to this newly created asset type.And more specifically:
- Granularity criteria or maximum % per bucket (for instance individual concentration percentage) might be considered, as banks effectively employ both portfolio strategies and there is pressure coming from the JST for less concentrated pools
- An amendment should be made to Article 1(c) of the original RTS, as there is no SSPE in synthetic format
- The original RTS for exposures under Article 1(iii) credit facilities or (vii) trade receivables, need to meet Article 1.(d) “one or more” homogeneity factors in Article 2, however there are no homogeneity factors in Article 2 for these asset types
- It might be desirable to clarify where Project Finance could fall, i.e. under either Article 1(a)(viii) ‘other exposures’ or amended Article 1(a)(iv) ‘any type of enterprise or corporation’, again whatever size.
Q8: Are there any impediments or practical implications of the criteria as defined in these draft RTS for STS traditional securitisations?
Not applicableQ9: Are there any important and severe unintended consequences of the application of the homogeneity criteria as specified in these RTS?
Yes.Please refer to our earlier comments. We believe it is not a good idea to create an extra category of “large corporates” by relying on a “sales >EUR500m” criterion, as it would exclude “large corporates” from synthetic securitisation transactions, while making it very unlikely to reach a “critical mass” of “large corporates” exposures to launch securitisation programs dedicated to this newly created asset type.
Besides, - Would split between large corporates and SME obligor types remain based on consolidated revenues size and not on underwriting and risk management principles, banks having no "large corporates" (CIB-type) activity will have to securitise separately their portfolios of loans to SMEs which belong - or not - to groups with annual sales > 500mln EUR, making securitisation much more difficult because of the limited size of their lending portfolio, and forcing them to retain concentrations that would otherwise be mitigated by securitisation of mixed pools.
- Would grandfathering not be applicable to STS synthetic securitisations executed after approval of the new STS framework, some STS deals will lose their STS status after one year and affect the amount of capital relief on these deals. This might ultimately trigger multiple regulatory calls (and therefore loss of protection for the affected banks). It makes no sense to provide for only one year of grandfathering on existing transactions that were structured before the rules even existed. We ask here for a level playing field with traditional STS securitisations, and implementation dates aligned with CRR3 implementation.