6/2/2025
So it begins. The European Commission, after months of listening (and years of hearing the arguments from the securitization market for reform), has laid down the gauntlet. Its proposals for reform have been leaked by MLex and the market is slowly digesting the two reports.
Make no mistake, this is the start of the biggest changes to the European securitization market since the post-GFC regulation came into place. But equally, this is just the beginning and there is a long, long way to go before any of what you read in the leaked Commission documents becomes law.
It’s been a long-time coming, I can recall talking about this process beginning on my flight back from Barcelona last year!
In the past 12 months, the Commission has been gathering feedback and data. And at the same time, political leaders like French
President, Emmanuel Macron and ECB President, Christine Lagarde have publicly called for securitization regulation reform.
The politicians compare reform of securitization to broader reforms of the EU financial markets and beyond. From that perspective, they see “relaunching” securitization a much easier task to achieve that will help unlock greater investment and economic growth in the EU. In comparison, things like the Savings and Investment Union are much more politically difficult.
So, that’s why these reforms are coming now and it’s why the early signs suggest that the Commission is not messing about – the measures proposed are significant, if somewhat rough around the edges.
But at this point, they are just that – proposals. Someone said to me a few months ago that these proposals would probably represent the ceiling of the market’s reform ambitions, not the floor.
I would be highly surprised if the reforms went through the entire EU legislative process exactly as they are. A few powerful member states might be on board (Macron), but MEPs will vote and amend the proposals in the coming months.
There will be some who start the process intrinsically opposed to any form of market de-regulation. Others who feel de-regulation of the thing that caused the GFC is a political risk they’re not prepared to take. And others still who may see this as a threat to their beloved Covered Bond market that don’t want that threatened.
I’m sure there are more types too, and eventually, you need enough MEPs happy enough to vote it through. For those reasons, it’s easy to see how the final rules are still quite a long way from view.
Nevertheless, the Commission’s initial proposals provide some much-needed clarity on the way forward.
The headline proposals seem to have been positively received, but there is still some concern around the details.
Risk Weight Floors: Perhaps the most significant proposal is the idea of risk sensitive risk-weight floors, alongside targeted adjustments to the p-factor.
The Commission appears to acknowledge that the current risk weight floors for senior positions are not proportionate and that the minimum floor levels will be lowered. In some cases, STS AAA tranches would halve their minimum risk-weight floors from 10% to 5% for ‘resilient’ transactions (more on that later).
Such changes would be significant to say the least, and would likely mean that the market is a much more appealing funding tool for banks and a more attractive sector for bank treasury teams too.
Here is an excerpt from Rabobank’s report, which mirrors the Commission’s leaked documents.
p-Factor adjustments: Related to this is the p-factor, a formula used in the risk-weight calculation. It has been the subject of much frustration in the past couple of years for being excessive (there was a major run-in, which market participants won, on how this made SRT transactions totally unviable in 2023/2024), but the proposals are to make targeted amendments.
The Commission said the current p-factor levels are “excessively high” and lead to “unjustified levels of overcapitalization” for some securitizations. Ultimately, they need to be more proportionate and risk-sensitive.
The proposals appear largely to reflect the arguments made in the May 2024 Risk Control Paper, authored by Georges Duponcheele, Marc Fayemi, Jeremy Hermant, William Perraudin and Frederic Zana.
One interesting development amongst it all is the focus on different ways that capital requirements are calculated. There are three options, SEC-SA (the standardized approach), SEC-IRBA (the internal ratings based approach), and the SEC-ERBA (the external ratings based approach).
Most of the largest financial institutions and banks use the SEC-IRBA, but smaller players (think challenger banks) often use the SEC-SA. The Commission appears concerned that the current rules mean if you are using the SEC-SA, you are unfairly penalized with heavier capital requirements for doing so.
“The non-neutrality of capital requirements is particularly high under the SEC-SA,” the report said. “And caused unjustified differences between the capital requirements calculated under SEC-IRBA and SEC-SA approaches.”
These proposals could therefore be significant in a market like SRT, making entrance into the market for smaller banks much easier.
There has been the odd SRT from smaller EU member states like the Polish bank, mBank, but it will be intriguing to see if these proposals mean SRT is expanded across the EU27.
On the one hand, the Commission acknowledges that securitization is subject to a burdensome stream of regulations, not all of which are truly necessary, and has proposals to trim some of it down. Yet on the other, they propose to add a new feature – ‘resilient securitization positions’.
The team at Rabobank have done a great job of breaking it down (which you can read here, although you may need to sign up)
But in short, the idea appears to function as a sort of “STS Plus”, although as Rabobank notes, non-STS investor positions cannot be resilient, but originator/sponsor positions can be.
There appears to be a bit of confusion when it comes to LCR and Solvency II. Rabobank’s aforementioned explainer report said it was “unknown”, and while that is correct, I think there’s a bit more to understand.
Many market participants see this area as a pivotal focus if you want to bring truly meaningful reform to European securitization. The jewel in the crown of reform, if you will.
The Commission’s report said part of the review of the EU Securitization Framework will include amendments to the LCR and Solvency II Delegated Regulations. But for now, there is no update.
The leaked documents only briefly touch on the LCR, saying they want to “extend the LCR eligibility buffer”. But Rabobank believes this refers to making AA- tranches eligible and NOT taking AAA securitizations from Level 2B to 2A.
Conversations I had while still a journalist and more recently suggest that Rabobank’s take is probably right at this point.
[For more info on the importance of Level 2B and 2A in the LCR, click here for Risk Control’s 2022 paper. And click here for my final story at GlobalCapital, which also covers it.]
But it’s important to understand that both the LCR and Solvency II are “level 2 texts” – meaning that unlike the broader EU Securitization Regulation, these regulations can be changed without having to go through the entire EU legislative process.
Instead, the LCR and Solvency II can be changed by the European Supervisory Authorities (ESAs – made up of ESMA, EBA, and EIOPA).
And as a result, my understanding is these Level 2 texts will undergo a consultation and review process which will run concurrently to the broader EUSR reforms as they pass through the European Parliament.
So, for those who may think that the Level 2A dream is over, I think you’ll just have to wait a tad longer to know that.
For more reading material, I should also highlight the work of GlobalCapital reporter, George Smith. Read here (paywalled).
I realise a fair few words have been dedicated to the regulatory update so, I’ll quickly cover off the deal flow.
There were a lot of CLOs this week, alongside a €2.5bn retained Consumer ABS from Credit Lyonnais and a €906m retained Italian Auto Lease ABS from Alba Leasing.
There were only two marketed securitizations however, from intermediary-only UK lender Quantum Mortgages and Bank of Ireland UK.
Quantum Mortgages’ £247.7m BTL RMBS, Bletchley Park Funding 2025-1 continued the trend of cautious IPTs to drum up demand before grinding tighter to good effect. The AAAs landed at 77bps over Sonia, and became the tightest BTL RMBS of 2025.
As Concept ABS said, the tightening on the mezzanine notes was not quite as “aggressive as preceding deals” but for just the second deal from Quantum, overall, a strong result.
Meanwhile, Bank of Ireland UK’s Bowbell shelf returned in a slightly different guise last week. The £350m Prime RMBS, Bowbell Master Issuer Series 2025-1 is the first from the platform as a master trust deal.
With Sterling issuance still way down on 2024 and demand technicals making this a proper issuer’s market, Bowbell was able to tighten aggressively from mid-50bps over Sonia to a final 50bps. It didn’t deter investors, with coverage ending on 2.5x covered.
Looking ahead, there are four Euro deals hoping to print before market participants set sail for Barcelona next week.
They all began marketing last week, so one would expect them to get done by Thursday.
In theory, there’s time for more deals before Global ABS, but I wouldn’t hold your breath.
See you in Barcelona!
Tom
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