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EBA expects work to unblock NPL securitization market

EBA tower 42 230x150
By Owen Sanderson
06 Jun 2018

The European Banking Authority could push forward a new set of regulations designed to make sure the securitization market can play a full role in resolving the non-performing loan problem faced by Europe’s banks, according to Adam Farkas, executive director of the EBA, speaking in a keynote address at the IMN/Afme Global ABS conference in Barcelona.

“We expect that there will be further work needed, and further consideration needed to make sure securitization can be indeed fundamental or instrumental in helping the European banking system to resolve NPLs,” said Farkas.

Farkas was not referring to the European Commission’s package of measures to promote secondary markets in non-performing laons, unveiled in March. This includes a proposed amendment to the Capital Requirements Regulation to push banks to sell NPLs, measures to improve servicing markets, and technical guidance to encourage states to set up national asset management companies to help work out NPL stocks.

The package, however, contains very little to improve the securitization market’s efficiency.

Farkas’ presentation, accompanying the keynote, highlighted the typical process of a portfolio acquisition — with a non-bank buyer, given acquisition financing by an investment bank in securitized format — suggesting this could be the focus of any new rule-making.

Not that the EBA has much spare capacity. Farkas said the regulator was working on 28 mandates, across the various forms of guidance and technical standards, trying to fill out the details of the wave of regulation passed post-crisis and as part of the “Capital Markets Union” reforms.

One particular area where the EBA might focus its attention is on capital weighting for senior tranches of NPL securitizations — particularly when on investment bank balance sheets as part of an acquisition financing ahead of a bond market take out.

In the banking book, these can end up treated as a capital deduction for some firms, or risk-weighted at perhaps 500%. Part of the issue, according to BNP Paribas’s Alexandre Linden, a senior transactor in the asset finance group, speaking on the GlobalCapital/Afme roundtable published on Wednesday, is that risk weighting does not give credit for buying portfolios at a discount.

Several banks are said to be working with the EBA on coming up with some sort of solution to this problem.

One banker at a US firm, however, said that some banks were already coming up with their own solutions to cut risk weights – such as treating senior loans to an acquisition SPV as corporate lending, rather than securitizations.

Some of the new regulation the EBA is working on promises to hurt, rather than help the market in non-performing loans. The new Securitization Regulation, which applies from January next year, is likely to crimp banks’ ability to finance legacy assets through Article 9, which insists that securitized assets have the same credit granting standards as non-securitized assets.

For certain kinds of legacy portfolio — a vanished originator, or an asset pool that’s changed hands several times — this is virtually impossible to prove, meaning some banks may not be able to get comfortable offering financing on such portfolios.

Afme’s head of fixed income Richard Hopkin questioned Farkas on Article 9, who said that he was aware of the problem.

“It’s one of these delicate details,” said Farkas. “When the framework was designed, the primary objective was not for NPLs. The robust requirements we introduced can sometimes cause problems. But I agree and take the point, and it needs further attention and discussion before we can sit back.”

Farkas said that securitization was particularly useful for the NPL market since the tranching of risk allowed a potentially more diverse group of investors to finance these portfolios, broadening the market out from the distressed debt and specialist buyers which typically put in equity or buy whole loan books.
By Owen Sanderson
06 Jun 2018