Asked about his proudest achievement, Christian Moor, team leader at the EBA, points to - perhaps unsurprisingly - the STS framework for synthetic securitisations.
‘’It was something that I thought about when I was on a holiday in April 2014 and it was clear to me that a more regulated and supervised product would improve funding to the real economy, especially to retail consumers and SMEs, and be overall good for society.’’
Yet Moor’s relationship with synthetic securitisations and securitisations more broadly goes way back. Indeed, his major contribution can only be understood when traced back to the dark days that was the aftermath of the 2008 global financial crisis.
‘’It was decided in 2011 that the market wouldn’t be killed off with new regulation. Yet there was a lack of regulation and the reality was that it was a multifaceted problem. It’s about different types of RMBS; it’s about synthetic securitisations, lack of default data and too much reliance on external ratings,’’ he says.
He continues: ‘’As such, the risk retention rules were introduced with only 5% retention levels and capital requirements were re-calibrated to more reasonable levels than initially proposed.”
Additionally, the EBA had to distinguish between securitisation products and started to develop STS and STC labels. Nevertheless, it was clear to the supervisor from the beginning that securitisation was important as a financing tool for the real economy and the low default rates for European securitisations added further impetus to these efforts.
The statements above encapsulate Moor’s distinctly consensual and balanced approach to financial regulation that earned him respect in both supervisory circles and across the securitisation industry. As he puts it: ‘’At the end of the day, regulatory frameworks shouldn’t be just prudential, but functional as well.’’
Nevertheless, the first steps in rehabilitating the market after the crisis focused on true sale securitisations. ‘’Several EU countries - including France and Germany - believed that synthetic securitisations performed well, so there were discussions on a synthetic STC framework, but it was shelved in one of the Basel meetings back in 2014-2015.’’
However, the failure of the Basel meetings became the starting point for an effort that would eventually lead to STS synthetic securitisations in the EU. In December 2015, the EBA produced a report that introduced the notion of an STS for balance sheet synthetic securitisations within the confines of Article 270 of the CRR.
Under these restrictions, synthetic securitisations could be executed with supranational institutions such as the EIF or cash collateralised with private investors. The report eventually led to a mandate in the CRR for the EBA to develop an STS for balance sheet synthetic securitisations.
Moor notes: ‘’The key points were the distinction between arbitrage and balance sheet synthetic securitisations and data transparency. Still, there was a fear among supervisors that banks could use this to overleverage. Yet banks use this for less than 5% of their loan books and this is something that can be monitored.’’
However, talks with supervisors centred around the inclusion of synthetic excess spread. The main worry was the amount of excess spread relative to the portfolio’s expected losses; concerns that initially excluded synthetic excess spread from the discussion paper on STS synthetic securitisations.
Discussions with market participants reintroduced the feature in the final report but limited it to the expected loss of the portfolio. ‘’Excess spread is crucial for the efficiency of many transactions, especially auto and consumer loan deals. They just cannot work without it. Again, regulation should not be just prudential, but also functional,’’ concludes Moor.-