Deutsche Bank

While there has been encouraging language from policymakers, there remain considerable regulatory challenges to the viability of securitisation:

a) Capital requirements:

The BCBS recently finalised the capital framework on capital requirements for securitistions held in the banking book and issued a third set of proposals on the trading book. In both cases, the resulting capital requirements are a multiple of capital requirements for the underlying pre-securitised assets. Left unchanged, these rules would substantially reduce the incentives for banks to participate in securitisations and consequently undermine the role securitisation could play in funding Europe’s real economy.

In our view, the best way to calibrate the capital requirements remains as follows:

 As a first step, the capital requirement for the securitisation should be limited to a portion of the capital requirement for the underlying exposures, at least for high quality securitisations. This reflects the fact that: i) the pooling of the asset does not change the credit quality of the underlying assets; and ii) securitisations benefit from overcollaterlisation which provides a payment stream in instances of unforeseen losses.
 As a second step, for those securitistions which do not qualify as high-quality, the calibration of the different tranches may include a suitable prudential buffer to address model risk and securitisation specific structural features. It is worth noting that model risk is not unique to securitisations, and If the prudence add-on is too high securitisation as a financing technique will be further discouraged
 We recommend that this approach should be replicated for the treatment of securitisations under the Fundamental Review of the Trading Book which is currently under consultation

b) Risk retention

We recognise that risk retention rules are an important element of the regulatory framework to align incentives for investors and issuers as well as restoring trust in the securitisation markets. Properly calibrated, they have real potential to incentivise originators, issuers and investors to conduct quality screenings, improve underwriting standards and adequately monitor for credit risk.

For a vibrant and robust securitisation markets, it is crucial to minimise regulatory inconsistencies. It is therefore important to ensure a level playing field between major jurisdictions originating and trading securitisations. Where risk retention rules serve the same objective of aligning incentives between investors and issuers, mutual recognition of risk retention rules should be granted.

It is our view that retention requirements for qualifying securitisations may not be required, given that: (i) investors are already subject to onerous due diligence requirements before entering into securitisation transactions; (ii) issuers are already subject to significant disclosure obligations under relevant public securities laws (e.g., the Prospectus Directive); and (iii) the types of transactions and level of transparency relating to qualifying securitisations means that such transactions should perform as they are described and understood.

This means there is no longer any misalignment of interests and that any residual retention requirement would simply serve to reduce the effectiveness of the securitisation market. This is the proposed approach taken by the U.S. authorities which waive the retention requirement for securitisation of qualified residential mortgages (QRMs) and in certain circumstances for other asset classes like commercial real estate (CRE), commercial loans and automobile loans.

c) Regulatory treatment of alternative asset classes with similar characteristics

The misperception around securitisation has resulted in disproportionately punitive regulatory treatment of securitisation instruments. The IMF noted that, particularly in Europe, securitisations are unfairly treated asymmetrically vis-à-vis other asset classes, such as covered bonds. This asymmetric treatment could have driven investors to use alternative instruments where securitisation could have provided a better solution to their credit needs and amplify risk concentration in the banking system.
We disagree with the approach of preventing synthetic securitisations from being considered qualifying securitisations. This blanket approach would remove a large number of securitisations which, from a regulatory policy perspective, would otherwise be eligible.

One example is securitisations of bank loan receivables. Here applicable bank secrecy, data protection and privacy laws prevent the bank from transferring the loans to an SPV. Contractual arrangements that would explicitly authorise the bank to assign and transfer loan receivables to a third party ( so-called “asset trading clauses”) may be common in some markets like large caps or auto financing; they are not used in consumer loans and loans to small and medium-size entities (SME). Consumer and SMEs view lending as a sensitive relationship and would normally not accept to face a third party as servicer. Banks use synthetic securitisation to hedge the credit risks stemming from its loan book. Deutsche Bank established well-known securitisation programmes that systematically hedge risks and we consider these programmes as tools for supporting lending to both consumers and corporates.

Another example is securitisations that use two-tiered structures involving two SPVs, where the first SPV holds the assets, the second SPV issues the notes that fund the acquisition of the assets and where the funding is passed-on to the first SPV through a credit linked note. Most U.S. securitisations (including asset-backed commercial paper programs) are based on such a two-tiered structure. The reason for using two-tiered structures is to enhance investor’s rights and the bankruptcy remoteness of the SPVs. The two-tiered structures are usually viewed as true-sale transactions because they use an initial transfer of receivables to the asset holding SPV, which segregates these assets from the originator. The second transfer to the issuing SPV, which is achieved synthetically, should not disqualify these transactions.

We believe that simple synthetic securitisation structures as described in the first example bear a significant advantage with respect to the moral hazard problem involved in the separation of underwriting and risk bearing, which is typical for all forms of risk transfer, if the originating bank can ensure that underwriting staff and credit officers monitoring the exposure do not decide that the risk in fact should be sold via a securitisation transaction. Fulfilling this requirement should qualify a synthetic structure as qualifying.
Please refer to AFME’s answer to this question
Please refer to AFME’s answer to this question
Please refer to AFME’s answer to this question
Please refer to AFME’s answer to this question
Please refer to AFME’s answer to this question

We believe that private transactions are already subject to the correct level of disclosure and transparency.

The purpose of transparency and disclosure requirements is to allow investors to make an informed assessment of the risks they are taking. Article 409 of the Capital Requirements Regulation (CRR) provides for a fully comprehensive level of disclosure to private investors without disclosing sensitive information to the public that would make these deals unattractive to the investor and hence undermine securitistion issuance.

Private securitisation transactions represent core bank lending facilities similar to the providing of corporate loans. They can help relatively new and fast growing sectors to obtain funding without having to disclose sensitive information to the public. Excluding private transactions outright, on the basis that they are deemed as non-transparent, runs counter to the CRR and may potentially hinder accessing finance for some companies.
Regulators and policy-makers should give due consideration to the risks that run as a consequence of designation of qualifying securitisations:

 Such designation may provide an implicit subsidy to assets or institutions that qualify easily. Regulators should consider the policy implications of an increased flow of capital to those markets or institutions; and

 It is important to consider what impact establishment of qualifying securitisations will have on perception of non-qualifying securitisations. We see it as necessary to support more junior tranches of safe and robust securitisation markets. In this regard, continuing to help improve the availability of data and analytics and seek to ensure that these are delivered as efficiently as possible, is key.
Please refer to our answer to Question 1.
Please refer to AFME’s answer to this question
Please refer to AFME’s answer to this question
Marta Gaska