15 February 2016
The European Banking Authority (EBA) published today final draft Implementing Technical Standards (ITS) on the mapping of External Credit Assessment Institutions' (ECAIs) credit assessments for securitisation positions. These ITS will be part of the Single Rulebook in banking aimed at enhancing regulatory harmonisation across the European Union (EU) and will allow the credit ratings on securitisations assigned by registered credit rating agencies to be used for the purposes of calculating institutions' capital requirements.
These ITS specify the correspondence or ‘mapping' between credit ratings and credit quality steps that shall determine the allocation of appropriate risk weights to credit ratings issued by ECAIs on securitisations where the Standardised Approach (SA) or the Internal Ratings Based Approach (IRB) for securitisations are used.
Following its consultation process, the EBA received feedback from a number of market participants who were generally positive with the proposals and raised no material objections. The Authority made minor amendments to these ITS incorporating such feedback received.
In the short-term, these ITS maintain the current mapping in place for all ECAIs. The mapping is supported by the outcome of an impact analysis as well as by qualitative considerations. The EBA is also considering developing a securitisation-specific systematic mapping methodology mainly based on the historical performance of securitisation ratings. However, the EBA deems that some caution is needed, for the time being, due to a number of factors, including the representativeness of the data used and the ongoing review of the regulatory framework for capital requirements on securitisations at both the international and EU levels. It is however the intention of the EBA to review the standards at a later stage, with a view of relying on a higher degree of quantitative information.
In view of the challenges that a mapping based on the historical performance of securitisation ratings would pose, these ITS do not exempt investors from their obligation to perform appropriate due diligence with regard to securitisation positions. When investing in a securitisation position, investors should always take into account historical performance of similar tranches and consider the rating performance of the different asset classes, some of which contributed to very high levels of defaults, contrary to rating agencies statistical expectations.
Furthermore, these ITS include a proposal to review the mapping of securitisation ratings, especially where default of securitisation positions are observed and to regularly monitor the performance of issued securitisation ratings by assessing the appropriateness of the mapping for any particular ECAI.
Legal basis and next steps
Regulation (EU) No 575/2013 (Capital Requirements Regulation—CRR) establishes that risk weights under the Standardised Approach and Internal Ratings Based approach for securitisation positions should be based, if applicable, on the credit quality of those positions determined by reference to the credit assessments of External Credit Assessment Institutions (ECAIs).
These final ITS have been developed according to Article 270 of the CRR, which mandates the EBA to specify the correspondence (‘mapping') between credit assessments and credit quality steps that shall determine the allocation of appropriate risk weights to ECAIs' credit assessments of securitisation positions.