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SCI Start the Week - 14 December

Category: ABS Capital Relief Trades CDO

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A review of securitisation activity over the past seven days

Last week's stories
Bellemeade bonanza
The latest Arch trade covers the same insurance vintage as June's 2020-1
ESN debate
Could structures cannibalise true sale ABS?
Finish line
Trilogue agreement finalised
Landmark SRT completed
Unusual synthetic securitisation inked
Leveraged finance: stepping into the void
Contributed thought leadership by Ocorian
Morgan manoeuvres (Full story below)
JPM's heavier than most capital burden underpins its keenness for CRT
Next step
Call for greater EPC data disclosure
NPL momentum
Call for specific securitisation framework
Real return
Money managers unlikely to be able to resist CLOs
Synthetic RMBS debuts
Raiffeisen completes capital relief trade

Other deal-related news

  • DBRS Morningstar has identified US$9.79bn in US CMBS loans transferred to special servicing since March, whose collateral was subsequently reappraised (SCI 7 December).
  • Moody's has adjusted its approach to assessing the default probabilities ratings of obligors included in CLOs; in particular, the analytical treatment of corporate obligors with a negative outlook or whose ratings are on review for downgrade (SCI 7 December).
  • ICE Benchmark Administration published its consultation on its intention to cease the publication of Libor settings (SCI 7 December).
  • The Australian Prudential Regulation Authority is undertaking a review of securitisation practices, having recently identified repurchased residential mortgage loans at some authorised deposit-taking institutions that were subject to repayment deferral from their securitisations (SCI 8 December).
  • The Joint Committee of the European Supervisory Authorities has clarified the impact of Brexit on the STS framework (SCI 8 December).
  • Moody's has upgraded from Ba2 to Ba1 the rating of the class E notes issued by Avon Finance No 1 (SCI 8 December).
  • Dock Street Capital Management has replaced Duke Funding Management as collateral manager to Duke Funding X (SCI 9 December).
  • Moody's has upgraded the ratings on 13 notes issued by nine Chinese auto ABS, following the upgrade of China's local currency country ceiling to Aaa from Aa3 (SCI 9 December).
  • CLO secondary market activity is booming across the board, but the underlying liquidity picture is a complex one (SCI 11 December).
  • Phinance Partners has completed, as arranger and advisor of the securitisation SPV POS, the purchase without recourse from Banca Sella of a portfolio of unsecured non-performing retail loans, for a total gross book value of approximately €24m (SCI 11 December).
  • The CFPB has issued two final rules related to qualified mortgage (QM) loans, which aim to support a smooth and orderly transition away from the GSE Patch and maintain access to responsible, affordable mortgage credit upon its expiration (SCI 11 December).
  • Fitch has placed 1,209 US RMBS classes on rating watch positive and has revised the rating watch for an additional 16 classes to positive from negative, following an update to its US RMBS surveillance and re-REMIC rating criteria (SCI 11 December).

Recent research to download
CLO Case Study Autumn 2020
Autumn 2020 CRT Report

Upcoming events
SCI's 2nd Annual Middle Market CLO Seminar
21 January 2021, Virtual Event
SCI's 5th Annual Risk Transfer & Synthetics Seminar
March 2021, Virtual Event
SCI's 3rd Annual NPL Securitisation Seminar
May 2021, Virtual Event

Morgan manoeuvres
JPM's heavier than most capital burden underpins its keenness for CRT

JP Morgan Chase has led the charge in the US CRT market in the last 12 months, but its urgency to make use of the mechanism has a lot to do with its specific and onerous regulatory capital burden, say market sources.

It is the biggest bank in the US with assets of around $2.7trn, almost $700bn more than its closest rival Bank of America. It also bears the heaviest capital burden, and, over the last year or so, it has grown even heavier.

In its Q3 earnings call on October 13, cfo Jennifer Piepszak said she expects the bank will probably be assigned a 4% GSIB surcharge once the Federal Reserve had completed its annual review of its balance sheet. This is a 0.5% bump from the current capital add-on of 3.5% - already the highest tier - and will increase its regulatory capital requirement by billions of dollars.

On November 27, it was reported that the Federal Reserve had assessed JP Morgan's GSIB systemic risk score to be 731.5 at the end of Q3, up from 728.17 at the end of Q2. This does indeed put JP Morgan in line for a 4% surcharge unless the risk footprint can be shrunk to 730 by the end of this month.

This follows the news in June that, following the Fed's annual stress tests, JP Morgan's common equity tier 1 (CET1) capital ratio threshold had increased from 10.5% to 11.3%. This extra 0.8% was due to the Fed's decision to introduce a new stress capital buffer to replace the previous capital conservation buffer. While the latter was a flat number, floored at 2.5%, the new stress capital buffer is based upon results of stress testing, and can thus increase, inflating the overall CET number.

Once again, this adds billions to the required thickness of JP Morgan's regulatory capital buffer. Citigroup's required CET ratio remained unchanged at 10% and Bank of America was also unchanged at 9.5%.

Based on 1Q RWA numbers, it increased JP Morgan's required CET1 ratio from $168bn to $181bn, and, by 3Q this had increased still further to $198bn.

A lot of these pressures were anticipated in comments made at the 2019 Investor Day, held on February 26. On that day, it led what one source in the CRT market describes as an "uncharacteristically candid discussion around RWA constraints, especially for a US bank that is always supposed to have a fortress balance sheet."

The presentation began with a slide that showed the gap between the assessment of RWA using standardized calculation and advanced calculation had grown markedly over 2018 to almost $100bn. Using the standardized approach, RWA was around $1.53trn but it was about $1.43trn using advanced methodology.

Subsequent incremental growth would be capitalized under standardized methodology, which is more expensive and less risk-sensitive, it said.

In the loan market, the focus henceforth would be on higher quality lending and the bank warned investors to expect a "slower pace of growth. Thus, "as marginal economics evolve, the Firm optimizes its balance sheet accordingly," it said.

The significantly greater use of the CRT mechanism by JP Morgan over the past year, with six deals in total referencing mortgages, auto loans and corporate loans, must be seen in this context, therefore, of rapidly accelerating balance sheet pressures.

JP Morgan has declined to comment.

Simon Boughey