We have no specific comments regarding the clarity of the proposed provisions. As discussed in our responses to the following questions, we believe that both the “full model” and the “simplified” approaches are inadequate and can even lead to arbitrage.
On the contrary, in our view, the so-called “alternative approach” is the only one that is adequate both from a prudential standpoint (it adequately reflects prudential risk) and from a cost-effectiveness standpoint (it makes sense, from an economic perspective, to use it in synthetic transactions, instead of thicker junior tranches). It is also simple and would ensure homogeneity across banks and JSTs. Finally and importantly, this “alternative approach” is compatible with the level 1 text.
Clarifications are thus not needed on the currently proposed RTS provisions, which we believe should not be retained in the final version of the RTS. The so-called “alternative approach”, however, should be developed in the final version of the RTS.
We have no specific comments on this possibility since we believe none of the proposed approaches provides for an adequate prudential treatment of SES.
Since they are based on lifetime deduction, both approaches are excessively penalizing, making SES economically unviable. The “scalar” proposed in the draft RTS does not solve the issue: the question is not whether the impact of lifetime deduction should be partially mitigated, but what a sensible prudential treatment of SES (either “trapped” or “UIOLI”) could be.
The only adequate prudential approach is the one that reflects the actual risk to which an originator is exposed. In the case of UIOLI SES, this risk spans over a one-year period, generally on a (quarterly) rolling basis. Therefore, only a deduction at 1 year (on a rolling-basis) makes sense from a prudential standpoint.
This is the so-called “alternative approach” referred to in the draft RTS, and which we believe should be developed as the only approach in the final RTS.
As explained above, we do not believe that either the “full model” or the “simplified” approach provides for an adequate prudential treatment of SES. We thus do not have specific comments on this question.
As explained above, we do not believe that either the “full model” or the “simplified” approach provides for an adequate prudential treatment of SES. We thus do not have specific comments on this question.
As explained above, we do not believe that either the “full model” or the “simplified” approach provides for an adequate prudential treatment of SES. We thus do not have specific comments on this question.
As explained above, we do not believe that either the “full model” or the “simplified” approach provides for an adequate prudential treatment of SES. We thus do not have specific comments on this question.
As explained above, we do not believe that either the “full model” or the “simplified” approach provides for an adequate prudential treatment of SES. We thus do not have specific comments on this question.
As explained above, we do not believe that either the “full model” or the “simplified” approach provides for an adequate prudential treatment of SES. We thus do not have specific comments on this question.
As explained above, we do not believe that either the “full model” or the “simplified” approach provides for an adequate prudential treatment of SES. We thus do not have specific comments on this question.
In our opinion, the so-called “alternative approach” is the one that makes sense both from a prudential standpoint and from a cost-effectiveness standpoint.
Hedging the expected loss in the capital structure is not efficient, as investors will consider that those losses will be almost certain. On portfolio with significant EL, such as SME portfolios, the calibration of the retained first loss is problematic in absence of SES mechanism, as expected losses will cumulate over time.
An UIOLI SES mechanism allows that the credit protection focuses on the unexpected loss part of the capital structure through the life of the transaction provided it is well calibrated
It is the case if synthetic excess spread available to cover future losses is defined and reset on each quarterly reporting date with the following constraints:
• Losses in respect of that excess spread can only be within one year following that reporting date
• Losses in respect of that excess spread cannot be above 1y EL defined at the start of the reporting period.
Under those conditions, we believe having an exposure amount based on the maximum losses that can be covered by the excess spread over a rolling window with a one year horizon is appropriate.
This one-year horizon is consistent with the Basel framework that uses an expected loss to a one year horizon. Taking into account future expected loss beyond this horizon would thus create an inconsistency with the overall balance of the framework : banks would have to deduct own funds expected losses that, without securitisation, should not be incorporated in the regulatory framework.
We also believe that it is compatible with CRR Article 248(1)(e). This article requires the EBA to specify the exposure value of elements (i) to (iv) that should be included in the exposure value of SES, ”as applicable”: in the case of UIOLI SES, amounts for “future periods” are not “applicable” and hence should not be deducted at inception. Rather, the nature of SES and the prudential risk to which banks are exposed should be taken into consideration to determine the adequate exposure value of SES. Typically, in the case of a UIOLI SES recalibrated quarterly, the originator is at risk over a one-year horizon, on a quarterly rolling-basis, not over a horizon extending until the maturity of the securitisation transaction. Requiring lifetime deduction of SES contradicts both CRR Article 248(1)(e) and the overall calibration of the Basel framework.
As explained above, treatment of ex-post SES in future periods, beyond a one-year horizon is not consistent with the Basel framework that uses an expected loss on a one-year horizon, and not beyond. Including in the exposure value Ex-post SES for future periods would assume that future incomes beyond one year impacted by the losses are also recognized on the current income statement of the institutions (and thus, in the institution’s own funds) which is obviously not the case.
As highlighted in our previous responses, both “full model” and “simplified” approaches developed in the draft RTS under consultation would make SES uneconomic. In other terms, originators would not have any economic rationale to use SES and would instead place larger junior tranches.
To be noted, regulatory uncertainty surrounding the prudential treatment of SES since the adoption of the Capital Markets Recovery Package has already undermined the use of SES, which is however a very useful tool in a number of transactions. SES is used, for instance, in transactions with the European Investment Fund, to encourage SME lending in the EU. We thus ask for a fairer treatment of SES in the final version of the RTS, based on the so-called “alternative approach”, which, in our view, is compatible with the level-1 text.
We have no specific comments regarding the clarity of the proposed provisions. As discussed in our responses to the following questions, we believe that both the “full model” and the “simplified” approaches are inadequate and can even lead to arbitrage.
On the contrary, in our view, the so-called “alternative approach” is the only one that is adequate both from a prudential standpoint (it adequately reflects prudential risk) and from a cost-effectiveness standpoint (it makes sense, from an economic perspective, to use it in synthetic transactions, instead of thicker junior tranches). It is also simple and would ensure homogeneity across banks and JSTs. Finally and importantly, this “alternative approach” is compatible with the level 1 text.
Clarifications are thus not needed on the currently proposed RTS provisions, which we believe should not be retained in the final version of the RTS. The so-called “alternative approach”, however, should be developed in the final version of the RTS.