Contents

Asset-Backed Finance

Balance sheet expansion eyed

ABF commoditisation set to boost sector adoption

Regulatory clarity will be a major theme this year as banks adapt to new capital rules under Basel 4. Investors are closely watching whether banks expand their balance sheets or shift assets into the non-bank sector, particularly in the asset-backed finance (ABF) space.

Alongside broader regulatory clarity, the potential lifting of Wells Fargo’s US$1.95trn asset cap - imposed by the Federal Reserve following the bank’s 2016 fake accounts scandal - could reshape bank participation in the ABF space. “If capital constraints ease, we may see a renewed focus on balance sheet expansion, with banks looking to manage risk via ABF,” says Charles Sorrentino, md and head of investments at Rithm Capital. “The first half of 2025 will provide key signals on market direction, particularly if banks begin reallocating capital or increasing alternative investments.”

Mergers and acquisitions could also catalyse wider bank portfolio optimisation. “More M&A activity presents opportunities for institutions to shed underperforming assets and restructure portfolios,” explains Satish Mansukhani, md and investment strategist at Rithm.

At the same time, market maturation is driving standardisation in documentation and risk-based pricing, thereby boosting confidence, sector adoption and overall leading to a greater commoditisation of ABF. “As processes that determine risk-based pricing and documentation narrow and simplify, the scope of assets will expand, increasing investor confidence and sector adoption,” adds Mansukhani.

Beyond banks, institutional investors - including insurance companies and private credit sponsors - are driving demand for ABF. “Institutional investors are increasingly recognising ABF as a way to diversify portfolios beyond corporate credit,” notes Sorrentino. “The ability to target specific risks and strengthen credit terms makes it a more flexible and resilient investment class.”

With a US$45bn balance sheet as of December 2024 and a strong pipeline built for 2025, Rithm is positioning itself to capitalise on each scenario. By leveraging its vertically integrated origination-to-servicing platform, the firm actively manages credit and optimises asset performance to adapt to these shifting market dynamics.

“The pipeline for 2025 is robust,” confirms Sorrentino. “Trends from 2024 are accelerating this year, particularly in RMBS and CMBS. Banks continue to optimise their capital bases.”

Within the SASB CMBS sector, for instance, Rithm is seeing ‘single-asset’ collateral diverging from ‘single-borrower’, as investors increasingly favour single-asset, high-quality trophy properties. “These are properties and portfolios that stand on their own merit - geographically, from an NOI perspective and in terms of leverage,” explains Sorrentino.

In contrast, single-borrower portfolio transactions require investors to place greater confidence in the sponsor’s ability to manage a diversified asset pool. “Historically, you either need an excellent property or a strong sponsor,” says Sorrentino. “Otherwise, investors tend to gravitate toward conduit CMBS transactions, which offer built-in diversification.”

Overall, Rithm anticipates CMBS issuance to remain strong in 2025, with sectors such as multifamily housing and industrial real estate – including data centres and logistics – continuing to show resilience. The office sector is likely to remain more fragmented, with investor sentiment heavily influenced by geographic and market-specific factors.

“The better-performing properties will continue to do well, particularly as interest rates stabilise. For investors, it’s all about credit fundamentals, sponsor strength and deal structure,” concludes Sorrentino.

Marta Canini

ABS

European and UK ABS: strong start, mixed views

January saw €8.1bn in ABS issuance, with strong demand, tightening spreads, but diverging manager perspectives

The European ABS market has delivered a dynamic start to the year, with strong issuance activity and robust investor demand, according to monthly European and UK factsheets monitored by SCI.

TwentyFour AM Momentum Bond Fund’s managers note that January witnessed significant issuance volumes, with €8.1bn in ABS transactions coming to market. The ABS market was particularly diverse, with strong participation from the RMBS sector, including debut issuances such as Nottingham Building Society's UK prime RMBS deal. Meanwhile, automotive ABS from Volkswagen and BMW saw robust demand, printing at tight spreads of around 0.48% over Euribor.

Aegon’s managers also point to strong performance in the ABS space, attributing tighter spreads to pent-up demand following a low-supply December. "With spreads still relatively attractive, demand has been buoyant, especially for non-senior ABS," Aegon states. The firm observes a 10% YoY decline in January issuance (€8.9bn in 2024 vs. €8.1bn in 2025), but emphasises that diversification remains a key theme in the market.

Amundi’s portfolio managers, however, describe January as a relatively quiet period for ABS primary issuance, contrasting with a more active CLO market. "We observed little change in spreads and few movements in the ABS market," the firm states. IT adds that, while CLO spreads tightened across all tranches, ABS remained stable. Amundi notes its participation in select ABS transactions, particularly in auto loan securitisations across Italy, Germany and commercial real estate deals in Ireland.

Across managers, there is consensus that spreads tightened due to investor appetite. TwentyFour Asset Management emphasises the resilience of European ABS spreads despite broader market softness. "Spreads in the European ABS market were well supported by strong demand and showed little correlation to the softness in broader markets towards the end of the month," the firm says.

Aegon shares a similar view, noting that "spreads remain broadly around the tights of the past four years." However, the firm also flags risks, citing geopolitical uncertainty, diverging central bank policies and macroeconomic fragility as potential sources of volatility.

Amundi, while acknowledging some spread tightening in the CLO market, is more measured regarding ABS, suggesting a relatively unchanged pricing environment in the secondary market. This contrasts with Aegon and TwentyFour AM’s perspectives, which highlights a more dynamic tightening trend.

Strong ABS demand to continue
Looking ahead, TwentyFour AM expects strong demand to persist, particularly from US and Asian investors. The firm sees the greatest value in senior tranches, given elevated supply levels and in the high-yield market, which looks attractive relative to corporate bonds.

Aegon also anticipates continued strength in ABS but warns that upside for spreads is limited. "With valuations tighter, there is limited upside for spreads and risks are to the downside,” the firm states. “Therefore, carry will be the most important driver of returns."

Amundi, while more cautious on ABS spread movements, remains active in both primary and secondary markets. The firm emphasises the importance of credit protection in light of ongoing geopolitical uncertainties, maintaining a consistent level of hedging through credit indices.

Fund specifics:

Amundi ABS returned +0.45% in January 2025. YTD: 0.45%
Fund size: €1.10bn. ABS/MBS allocation: 93.93%

Janus Henderson ABS Fund returned +0.59% in January 2025. YTD: 0.59%
Fund size: £335.2m ABS/MBS allocation: 58.93%

TwentyFour AM Monument Fund returned +0.66% in January 2025. YTD: 0.66%
Fund size: £1.81bn. ABS/MBS allocation: 61.23%

Note: Aegon European ABS Fund’s January factsheet is not available yet.

Selvaggia Cataldi

Capital Relief Trades

Record breakers

New Q1 record issuance in sight

This quarter is set to make new records for Q1 in the global SRT market with an estimated US$5bn of total issuance, say market sources.

Nor is this a flash in the pan. The second quarter is generally busier, so next quarter could see even more voluminous issuance.

“The market is growing up, it’s more confident,” said a veteran London-based asset manager, explaining the surge. The investor pool is increasing, and more buyers are becoming more familiar with the unique exigencies of this market.

But the market has also received a fillip from the ECB, which this week announced a pilot scheme to reduce the time required for approval of SRT deals from around three months to perhaps one month.

“The SRT assessment of an individual securitisation transaction currently takes about three months. The fast-track process aims to substantially reduce this time for sufficiently simple securitisations meeting certain requirements,” said the ECB when the fast track scheme was unveiled two days ago.

Issuance has been concentrated in Europe, but North America has seen business too. Bank of America and US Bank are lining up deals to close before the end of Q1, while Merchants Bank of Indiana, and Bank of Montreal are reported to be looking at completing reg cap deals to reference CRE.

Total issuance hit US$29bn of notional principal in 2024, some 20% higher than the previous year, but the market could exceed that total in 2025 as the traditionally busier quarters still lie ahead.

Meanwhile, in Europe, small Italian lender BPER Banca (€140 billion in assets) is considering selling its first reg cap deal. It is thinking about issuing an SRT inked to €2.5 billion in loans to small and medium-sized Italian companies, say reports. This further indicates that the reg cap market is becoming mainstream and not restricted to bigger and more sophisticated banks.

Market veteran Commerzbank is also seeking to increase SRT usage with plans to cut €10bn in RWAs by 2028, say reports. Austrian lender Bawag Group is set to launch a deal linked to a portfolio of about €2.4bnof Austrian mortgage loans, the first of three trades planned for this year. It debuted in the market last year. Recent acquisitions have grown the bank balance sheet by over 35% and it needs to shed risk.

Simon Boughey

Structured Finance

Scope of ESMA consultation questioned

Private securitisation disclosure proposal 'puzzling'

ESMA last week launched a consultation on revising the disclosure framework for private securitisations under the Securitisation Regulation (SECR), proposing a simplified reporting template designed to improve proportionality in information-sharing processes. However, the timing and restricted scope of this latest consultation is questionable.

“ESMA's proposals could streamline the reporting requirements for certain transactions. However, they also exclude a large number of transactions that market participants had been hoping would benefit from any reform of the private securitisation reporting regime and do not completely remove the possibility that a full set of public disclosure information would need to be provided at some point during the life of a transaction,” a new DLA Piper briefing observes.

The ESMA consultation contains a draft amendment RTS that sets out the private disclosure template, in the form of a new Annex XVI, which would be used to provide the quarterly information on underlying exposures under Article 7(1)(a). DLA Piper notes that this represents a relatively simple "quick fix" along the lines of the ‘Option C’ described in ESMA's December 2024 feedback statement. 

However, the draft amending RTS includes a new definition for a ‘European private securitisation’, for which no prospectus has to be provided in accordance with the Prospectus Regulation and "where the originator, sponsor, original lender and SSPE are established in the Union". Use of the new Annex XVI is therefore only permitted in the case of a European private securitisation and the Article 7(1)(a) reporting for any other securitisation would continue to have to be done using the existing templates in whichever of Annexes 2 to 10 is relevant and on a loan-level basis. 

Proposal limited to all-EU issues

ESMA's proposal to limit use of the proposed simplified template to all-EU issues is viewed as puzzling, considering that the European Commission Article 46 report in October 2022 noted that Article 5(1)(e), in conjunction with the rules laid down by Article 7, de facto excludes EU institutional investors from investing in certain third-country securitisations because the third-country sell-side parties might not be interested in providing the necessary information according to the procedures set out in Article 7.

The EC further noted that the wording of articles 5 and 7 might deserve thorough reconsideration, but that in any event, the envisaged measures to amend the technical standards that set out the transparency requirements of Article 7 might help reduce the competitive disadvantage for EU institutional investors because this will make it easier for sell-side parties from third-countries to provide the required information. 

In its briefing, DLA Piper points out that there is no explanation for ESMA’s proposed approach, other than a statement in recital (4) of the draft amendment RTS that such transactions are "different both in terms of definition and scope from third-country securitisations". “The thinking may be that, while we await the outcome of the level 1 review, there should be a sell-side entity in scope of Article 7. But this misses the point as regards EU investors and non-EU securitisations,” the firm observes.

An additional feature that may limit potential benefits of the private securitisation disclosure regime is that ESMA proposes that originators, sponsors and SSPEs of private transactions would still be required to provide the full set of ‘public’ disclosure information outlined in Article 7(1)(a) of the Securitisation Regulation to investors, potential investors and competent authorities upon request. “If an originator has not established the systems necessary to provide such reporting, responding to such a request may be difficult. If the possibility of receiving such a request means that transaction parties have to set themselves up in a way that enables them to comply with the full public disclosure requirements of the SECR on demand, many of the benefits of falling within the reduced disclosure regime would surely be lost,” DLA Piper adds.

Annex XVI follows SSM template

The required detail under the new Annex XVI follows the ECB SSM notification template as regards matters such as the main parties, the key characteristics of the securitisation, the portfolio's main currencies, jurisdictions, exposure classes and the risk retention method. Additionally, it asks for breakdowns of defaulted, past due and restructured amounts (by month, up to six months past due). It also suggests that available information on environmental performance should be reported.

The significant improvement is that this information is to be provided on an aggregate basis, not in relation to each individual underlying exposure, as is presently the case under article 4 of the Disclosure RTS.

PCS indicates that it’s unclear how ESMA’s latest consultation fits in with the European Commission's publicly announced aim of publishing a proposal for a thorough revision of the entire securitisation framework by early summer. “Revision of the disclosure regime was always believed to be one of the elements of this proposal. Is this consultation part of the Commission's plans? Is this a separate exercise? If it is a separate exercise, will it be superseded by the Commission's proposals?” the organisation asks.

PCS continues: “The consultation appears explicitly to assume that any lightening of the disclosure burden would not apply to non-EU transactions. But, as with the definition of ‘private’, the issue of the treatment of non-EU transactions is a key element of the debate around disclosure.”

ESMA is seeking comments on the consultation by 31 March. The authority says it will work closely with the European Commission to explore whether adjustments to the technical standards, particularly regarding disclosures for private securitisations, can be implemented before the review of the regulation itself.

Corinne Smith

Asset-Backed Finance

Neuberger Berman closes US$1.6bn ABF fund

Firm exceeds expectations as demand for asset-based finance grows

Neuberger Berman has held a US$1.6bn final close for Speciality Finance Fund III, signalling strong institutional demand for asset-backed finance strategies. Surpassing its initial US$1bn target, the fund marks a key milestone in the firm’s expansion within private credit, as both intuitional appetite and investor interest in ABF strategies strengthens.

The vehicle is already 45% deployed across a range of asset-backed investments, including consumer and small-business receivables, hard assets, and esoteric credit. The firm said in a statement that the success of the fundraise demonstrates the strength of its platform and investor confidence in its ability to source and structure attractive opportunities.

The announcement represents a significant expansion of Neuberger Berman’s ABF strategy, having already committed more than US$4bn to ABF investments across 50 companies since 2018. 

“The asset based finance markets have a large TAM and continue to grow each year,” Peter Sterling, head of NB specialty finance tells SCI. “Our team has been investing in the space for quite some time and benefits from a strong network. The key to long term success will be the direct company relationships and a deep understanding of how to underwrite deals in a sector that is constantly evolving.”

The firm is not alone in ramping up its ABF activity, as other major players also work to expand their strategies. Private credit firms are increasingly capitalising on the shift as banks pull back from riskier segments due to regulatory pressures and higher funding costs

Yet Sterling says Neuberger Berman’s strategy is differentiated compared with other major participants in the ABF space. “NB’s specialty finance platform has the ability to consider various sectors as well as different transaction structures that may be unique to a particular deal,” says Sterling. “We’re very focused on a bottom up structured approach to create protections versus a top down call on the macro markets.”

In the aforementioned statement, Neuberger Berman said that, due to traditional lenders retrenching from certain segments, the firm continues to see “compelling opportunities to provide flexible capital solutions to businesses in need of financing”.

Neuberger Berman’s latest fundraise reinforces ABF’s increasing importance within private markets, with capital flowing toward asset-backed lending as an alternative to conventional financing. As banks continue to scale back from certain lending segments, vehicles like NB Specialty Finance Fund III are set to play a greater role in shaping the future of credit markets.

Claudia Lewis

Capital Relief Trades

Latest SRTx fixings released

A breather

While January traditionally sees benchmark deals from established issuers price – reportedly 100+bps tighter year-on-year – this month’s SRTx fixings and projections suggest that spreads are taking a “breather” (Large corporate: EU +8.1% US +10.3%; SME: EU +7.1%, US +0.7%) off tightened levels following worldwide flattening of the credit curve and tightening across all asset classes (even into higher rates). In fact, last month’s data culminated in SRTx’s tightest spread on record (since its launch in March 2023). As added context, in its latest SRT (Reg Cap) market update, Seer Capital Management positions spreads for new issue in the 650 to 900bps range over the past few months, around 100bps tighter than 1H2024 prints.

The SRTx Spread Indexes now stand at 823, 563, 900 and 958 for the SRTx CORP EU, SRTx CORP US, SRTx SME EU and SRTx SME US categories respectively, as of the 7 February valuation date.

Meanwhile, volatility sentiment sees little change month-on-month, with a small volatility oscillation in the indexes. While geopolitical uncertainty, trade wars, diverging central bank policies and political unrest in the euro area could or will increase the possibility of volatility in financial markets, sources report that there is plenty of cash to put to work. The last week of January was additionally marked by a strong increase in risk aversion related to AI-related securities and DeepSeek, which led to an increase in stock volatility but had little impact on credit. This was followed by a second wave of volatility when President Trump announced the imposition of significant tariffs on Canada, Mexico, and China. The EU is likely next on the list, but again, credit was not impacted.

The SRTx Volatility Index values now stand at 50, 65, 50 and 56 for the SRTx CORP VOL EU, SRTx CORP VOL US, SRTx SME VOL EU and SRTx SME VOL US indexes respectively.

As far as liquidity goes, the most significant shift concerns the US SME segment (+22.2%). Quite concretely, the data can be interpreted as further uncertainty prompted by the new Trump administration and what the rules of engagement are going to be.

The SRTx Liquidity Indexes stand at 47, 60, 47 and 69 across SRTx CORP LIQ EU, SRTx CORP LIQ US, SRTx SME LIQ EU and SRTx SME LIQ US respectively.

Finally, the outlook for credit risk is still trending mildly higher (Large corporate: EU -2.8% US -7.7%; SME: EU +-2.8%). The notable figure is the prominent shift in the US SME segment (+37.5%), corroborating a general increase in delinquencies. Overall, the credit risk environment is biased worse, compared to a positive environment a year ago.

The SRTx Credit Risk Indexes now stand at 59 for SRTx CORP RISK EU, 50 for SRTx CORP RISK US, 59 for SRTx SME RISK EU and 69 for SRTx SME RISK US.

SRTx coverage includes large corporate and SME reference pools across the EU and US economic regions. The index suite comprises a quantitative spread index - which is based on survey estimates for a representative transaction (the SRTx Benchmark Deal) that has specified terms for structure and portfolio composition - and three qualitative indexes, which measure market sentiment on pricing volatility, transaction liquidity and credit risk.

Specifically, the SRTx Volatility Indexes gauge market sentiment for the magnitude of fixed-spread pricing volatility over the near term. The index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating volatility moving higher.

The SRTx Liquidity Indexes gauge market sentiment for SRT execution conditions in terms of successfully completing a deal in the near term. Again, the index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating that liquidity is worsening.

Finally, the SRTx Credit Risk Indexes gauge market sentiment on the direction of fundamental SRT reference pool credit risk over the near term. The index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating that credit risk is worsening.

The objective of the index suite is to depict changes in market sentiment, the magnitude of such change and the dispersion of market opinion around volatility, liquidity and credit risk.

The indexes are surveyed on a monthly basis and recalculated on the last trading day of the month. SCI is the index licensor and the calculation agent is Mark Fontanilla & Co.

For further information on SRTx or to register your interest as a contributor to the index, click here.

Vincent Nadeau

Capital Relief Trades

Bank comeback

US Bank and BoA to close Q1 reg cap trades

Two US bank issuers – US Bank and Bank of America – are poised to close reg cap trades before the end of the quarter, say market sources.

The first of these will close a transaction referencing a US$5bn portfolio of corporate loans. In contrast to US Bank's previous forays into the market, the deal is divided into various tranches rather than a single loss position, add sources

There are no further details on tranches and pricing.

Bank of America will close a smaller single tranche US$1bn deal also referencing corporate loans. It is offering a 0%-9% first loss position, so the sale amount will be US$90m.

This deal is said to be for the purpose of testing the waters and making sure all the internal processes are running smoothly before it returns to the market with a larger deal.

Merchants Bank of Indiana and Bank of Montreal are also said to be lining up reg cap trades referencing commercial real estate exposure.

Merchants Bank of Indiana is a repeat issuer and Bank of Montreal is the doyen of the Canadian issuers - having established six separate SRT programmes.

It has assets of US$52.5bn at December 31 2024, making it among the top 50 banks in the US and in the top ten Texas-based institutions with 155 branches across the state. Its loan book is around US$20.5bn and has grown by US$3bn in the last four years.

Simon Boughey

CLOs

Wellington Management closes debut CLO fund on US$194m

CLO Partners Fund exceeds US$150m target to invest in BSL CLO equity tranches

Investment management firm Wellington Management has closed its inaugural Wellington CLO Partners Fund I, raising US$194m in capital commitments, including US$27m from affiliates. 

The vehicle focuses on majority equity tranches of Wellington-managed US broadly syndicated CLOs and has surpassed its initial target of US$150m.

Alyssa Irving, CLO portfolio manager at Wellington Management, told SCI that the investor base is predominantly US-based, and includes foundations, family offices, and insurance.

"Demand for the CLO equity asset class is evolving,” said Irving. “There are investors who have invested in the asset class for many years and often have a strategic allocation. There are also many newer investors in the asset class who are focused on understanding the role it plays in asset allocation.” 

She continued: "In 2022 to 2023, it felt like there was much more of a focus on double-B CLOs, given the high all-in yields. But as yields have normalized in double-Bs, we have seen investor sentiment shift back toward CLO equity," says Irving.

As of 30 September 2024, Wellington has deployed three CLOs and plans to issue two to three additional deals per year. 

"We believe CLO equity is a compelling asset class, and we anticipate further opportunities to pursue investment excellence on behalf of LPs in the current and future market environments," adds Irving. 

The firm has been involved in bank loans and CLO tranches since the early 2000s, with approximately US$535 billion in fixed-income assets.

The firm manages US$1.2tn of assets across equity, fixed income, multi-asset, alternative and private markets strategies.

Wellington declined to comment on when it is planning to launch its sophomore CLO fund.

Camilla Vitanza

Structured Finance

Job swaps weekly: Reckoner launches with backing from RedBird

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees the launch of Reckoner Capital Management, an alternative credit asset manager led by a former Panagram Structured Asset Management ceo and cio. Elsewhere, a former Goldman Sachs partner and securitisation specialist has joined One William Street Capital Management as deputy cio and partner, while Chorus Capital has snapped up a former senior exec from Demica as head of business development.

New global alternative credit asset manager Reckoner Capital Management has launched, with the backing of RedBird Capital Partners. Led by co-founder and ceo John Kim, the firm will capitalise on the team’s extensive experience investing in credit assets to provide tailored solutions for regulated, institutional and retail clients.

Headquartered in New York City, Reckoner seeks to leverage a comprehensive view of the credit markets to deliver premium, customised investment solutions across liquid and illiquid investment-grade fixed income and structured products. The team’s track record of managing scaled portfolios with above-market returns will support Reckoner’s mission to meet growing demand for public and private credit products.

The firm is led by a proven management team with decades of experience in credit investments. Alongside Kim, Reckoner was co-founded by Ricky Li, Timothy Wickstrom and Jamie Kim, who all previously worked together at Eldridge Industries structured credit subsidiary Panagram Structured Asset Management.

Meanwhile, Kaushik Murali – a former partner and head of macro credit, CLO and CRE trading at Goldman Sachs – has joined One William Street Capital Management as deputy cio and partner, based in New York. In his new role, he will be responsible for public investments, focusing on credit and market risk, in addition to being a member of the investment steering team. OWS has more than US$7.5bn in AUM, primarily across asset-backed and structured credit investments. Murali left his position as partner at Goldman Sachs in October after 20 years with the firm.

Chorus Capital has recruited Adam Barrett as head of business development, overseeing the firm’s engagement with existing and prospective investors in its funds. Based in London, he reports to Chorus Capital ceo Gilles Marchesin, who he worked alongside at Goldman Sachs from 1998 to 2002.

Barrett has held various head of distribution and sales roles over his 40-year career, including at Barclays and Lloyds. He was previously head of distribution at Demica, which he joined in March 2020.

Aparna Sehgal has joined Winston & Strawn as partner in the firm's structured finance practice and chair of the structured finance and real estate finance teams in the UK and Europe. Based in London, she focuses on multijurisdictional real-estate-backed transactions in the UK, continental Europe and US, with particular expertise in back leverage. Sehgal leaves her role as head of Dechert's European structured finance and real estate finance practice after five and a half years with the firm. She previously spent 14 years at Sidley Austin.

And finally, Moody’s has named Marc Pinto as global head of private credit. In this role, Pinto will lead research and rating initiatives on private credit across the rating agency and continue to co-head the insurance team globally. He is tasked with promoting engagement across Moody’s financial institutions, corporate finance and structured finance rating groups, while enhancing expertise in growth areas of the private credit industry, including fund finance, private asset-backed securities (ABS) and privately placed investment-grade corporate assets.

Corinne Smith, Kenny Wastell

Capital Relief Trades

SRT fast-track testing underway

Market updates and sector developments

The ECB is set to begin testing a new fast-track process for the supervisory assessment of SRT, which it has developed in close dialogue with the European Banking Federation. The SRT assessment of an individual securitisation transaction currently takes about three months, but the fast-track process aims to substantially reduce this time for sufficiently simple securitisations meeting certain requirements.

Banks are only allowed to reduce their capital requirements when the supervisor acknowledges that the securitisation transfers a significant amount of risk to third parties, which is known as significant risk transfer (SRT). This requires a positive SRT assessment from the competent authority, acknowledging that risks have been transferred and will not be re-assumed by the originating bank during the lifespan of the securitisation.

Under the new process, supervisors will save time by leveraging on product standardisation and harmonised templates, while assessing deals against all applicable provisions of the existing regulatory framework. For complex and innovative securitisations, the ECB will continue to carry out a detailed assessment and scrutinise whether a significant transfer of risk has been achieved.

“The testing phase will be crucial, both to see whether the new process brings the expected benefits - including a shift towards further simplification and standardisation - and also to check that the eligibility criteria and templates are fit for purpose. It is now up to banks to carry out simple securitisations to ensure that the new fast-track SRT process can be widely used,” the ECB states.

The review of individual transactions will be accompanied by ex post checks and a regular monitoring of banks’ securitisation activities, complementing the regular assessment of their securitisation-related risk management and governance arrangements. The ECB expects banks to adequately manage the risks related to their overall securitisation activities and integrate those risks in their internal processes. This includes, for example, appropriate stress testing and taking securitisation activities into account in capital planning and risk management.

Another important element of the ECB’s analysis is understanding who ultimately bears the risks and whether they are adequately managed. For example, if banks were providing leverage for credit funds to invest in securitisation, this could result in substantial hidden risks being retained in the banking system – with lower capital coverage overall.

The ECB warns that such activity raises prudential concerns. Banks are therefore expected to identify and mitigate risks linked to interconnectedness with securitisation investors. Enhancing reporting and disclosure requirements for non-bank financial institutions, for example, would facilitate the identification and monitoring of interconnections stemming from securitisations.

“Long-term market development requires a genuine transfer of risks outside the banking sector, to a diversified investor base that is able to manage those risks. The use of simple and standardised products will help the development of the market, while also supporting financial stability and attracting new investors,” the ECB concludes.

Corinne Smith