According to the EBA, the marked differences in default rates between EU and US Securitisation are mainly due to:
1. Poor assessment and monitoring of the creditworthiness of the underlying mortgage borrowers.
2. Misaligned incentive structures for sponsors and originators (OTD model)
3. Complex securitisation and re-securitisation processes
4. Limited disclosure requirements
5. An overreliance on credit agencies
Securitisation Market Performance pre/post Crisis 2008
European securitisation performance
has demonstrated negligible defaults
pre and post crisis, compared to the
US market 0,2%
46,0%
62,0%Default rates of BBB
Securitisations
during the crisis
Prime & Subprime Prime Subprime
16,0%
0,1%
3,0%
Default rates of AAA
Securitisations
during the crisis
Prime & Subprime Prime Subprime
Source: EBA Discussion Paper on STS securitisations, European Banking Authority, 14 Oct 2014
Despite the superior performance of European ABS, the US market has recovered to pre-2008
issuance levels
Current State of the Securitisation Market
Source: AFME Capital Markets Union Measuring progress and planning for success – Sep 2018
Great difference between the values in the US
and the EU, as the EU value has not exceeded 2%
since 2007
0
100
200
300
400
500
600
700
800
900
2004 2006 2008 2010 2012 2014 2016 20180
500
1.000
3.000
1.500
2.000
2.500
3.500
4.000
4.500
Securitisation and portfolio sales
as % of outstanding loans
considering only instruments
that enable the risk associated
with loans to be transferred to
investors (without covered
bonds or retained
securitisations)10
5
10
15
20
25
2004 2006 2008 2010 2012 2014 2016 2018
%
1.Covered bonds are very rarely issued in the US, and all US securitisation issuance is placed on the public markets.
EU Total securitisation and
covered bond issuance
Strong relationship between securitisation
issuance and bank loan new issuance.
€bn
EU Total Securitisation Issuance (left hand scale)
EU Covered Bond Issuance (left hand scale)
EU Bank Loan New Issuance (right hand scale)
Three Different ABS Structures
B
A
B
A
BC
D
A
C
Traditional Traditional with Capital Relief Synthetic Capital Relief
Traditional Securitization
with sale of underlying
contracts.
Pure funding transaction
AAA Rated Class A
Retained all the risk
Traditional Securitization
with sale of underlying
contracts.
Funding and capital relief
transaction
AAA rated Class A, A Rated
Class B
Class D retained for the
economics of the deal
Capital relief obtained due
to the fact that the sold
tranches covers the
Expected (EL) and
Unexpected Losses (UL) in
the pool, which is evidence
that the risk has been sold.
Synthetic securitization
No sale of contracts
No rating
Pure Capital Relief
Class C will be retained for the
economics of the deal
Class B will cover the EL and UL
evidencing that the risk in the
portfolio has been effectively
transferred to the counterpart.
Retained by sellerSold to investors
ABS Funding Structure
B
A
Traditional
• Traditional Securitization with sale of underlying contracts
• Pure funding transaction
• AAA Rated Class A
• Retained all the risk
Retained by sellerSold to investors
What are Asset Backed Securities?
9
• Asset backed Securities (ABS) are a way of converting assets with predictable cash flows (for example auto loans, consumer loans , leases, etc.) into marketable securities in order to obtain financing
• The pool of assets are sold to an Special Purpose Vehicle (SPV) which will issue securities (loans) backed by pools of assets (thereby “asset backed securities”)
• The securities are sold to institutional investors
Pool of assets Marketable securitiesIssuer (SPV)Assets Liabilities
Class A Notes
Class B Notes
InvestorsSeller (bank)
Purchase Price
Portfolio
Swap
Transaction
Account Bank
Agreement
Servicing
AgreementCollectionsAuto Loans
Notes
Issue Price
Subordinated
Loan
Servicing
Relationship
SPV
Debtors
Seller
Transaction Account
Bank
Security Trustee
& Note Trustee
Swap CounterpartySubordinated Loan
Provider
Servicer
Noteholders
Potential Parties to a Transaction
10
= bank
Credit enhancement and loss absorption
Structure of the Transaction
11
First loss
Loan portfolio
A Notes
B Notes
Excess
spread
Reserve Fund
1
Second loss2
Third loss3
Fourth loss4
Subordinated Loan
Securitisations are Cash Driven
12
Time
Outstanding loan balance
%/NOK
100%NOK 5,000 mill
20%NOK 1,000 mill
Outstanding Note balance
%/NOK
B Notes
A Notes
• Any principal payments received on the loans are
used to pay down the notes on a 1:1 basis (“pass
through”)
• The A notes are paid down in full before any
principal repayments are made on the B notes
• Consequently the amortisation profile of the loan
portfolio and notes are the same
ABS Structure with Funding and Capital Relief
B
C
D
A
Traditional with Capital Relief
• Traditional Securitization with sale of underlying contracts
• Funding and capital relief transaction
• AAA rated Class A, A Rated Class B
• Class D retained for the economics of the deal
• Capital relief obtained due to the fact that the sold tranches
covers the Expected (EL) and Unexpected Losses (UL) in the
pool, which is evidence that the risk has been sold
Retained by seller
Sold to investors
Approval of Significant Risk Transfer
Significant transaction detail must be provided to the regulator in advance of closing (pre-notification). Following closing, a final
notification must also be delivered confirming the final details of the transaction.
If the SRT tests are passed, an institution may recognise the effect of the transaction in their capital calculations immediately. However,
the regulator retains the right to reject the application of SRT at any time during the life of a transaction.
In 2017, the EBA also released a SRT Discussion Paper, which is being heavily utilised by regulators when analysing current
transactions, despite this not yet being a formal, regulatory text.
Process
Synthetic ABS Structure
A
B
C
Synthetic Capital Relief
• Synthetic securitization
• No sale of contracts
• No rating
• Pure Capital Relief
• Class C will be retained for the economics of the deal
• Class B will cover the EL and UL evidencing that the risk in
the portfolio has been effectively transferred to the
counterpart.Retained by seller
Sold to investors
Synthetic Securitisations
New EU Securitisation Regulation1: “…a securitisation where the transfer of risk is achieved by the use of credit derivatives or
guarantees, and the exposures being securitised remain exposures of the originator”.
The underlying assets are not sold / transferred into a SSPE2 – the assets remain on the balance sheet of the institution issuing the
securitisation.
It is just the credit risk of these assets that is transferred, normally via a credit default swap (CDS) or a financial guarantee.
The CDS / financial guarantee references the underlying assets, with the counterparty(ies) to these instruments incurring the credit risk
related to the assets.
Definition
1 Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017. | 2 Securitisation Special Purpose Entity.
Method of transferring risk to end investors, enabling them to share in the relating credit risk of the underlying assets.
Allows investors to gain exposure to real economy assets, such as consumer and corporate loans, without having to develop in-house
origination and servicing capabilities.
Enable issuers to reduce the risk of their balance sheets, being compensated by investors in the event credit risk losses are incurred on
the underlying assets.
As a result of the risk reduction, can also enable banks to reduce their capital requirements.
Purpose
Securitisation for Capital Relief
• Capital relief from RWA reduction.
• Costs compare favourably to cost of capital.
• No dilution of shareholders.
• Preserves client relationship.
• Recycles capital into new lending.
State of Securitisations in EU and Santander in a nutshell
19
A post-crisis stigma is
attached to the whole
Securitisation market…
• Lack of investor due diligence
• Resulting in inability to
distinguish “good ABS” from
“bad ABS”
• Despite extremely low
European default experience
Securitisations continue
being an important part of
well-functioning financial
markets…
• Unique role of securitisation to
transfer risk (vs covered
bonds)
• Reduction of encumbrance
ratio
• Transfers risk outside of
banking system
• Allows banks to continue
lending to the real economy.
The European Commission
has taken a positive view
and aims to restart EU
Securitisation market…
• Reviving securitisation at the
centre of its plan for a Capital
Markets Union (CMU)
• The European Commission is
supporting the growth of a:
• Simple
• Transparent
• Standardised
securitisation market
Santander has played over
the last years an active role
in promoting a high quality
securitisation market
• Founding shareholder of
European Data Warehouse, a
data repository promoting
information transparency to
investors
• Founding member of PCS, a
private sector initiative which
awards quality labels to qualifying
ABS
• Active participant in EBA
working groups developing STS
and SRT criteria
• Active member of AFME, EBF
and LeaseEurope which
participated heavily in the
development of STS.
STS Legislation RequirementsSTS “Simple” Criteria
Portfolio ordinary course of business. Stable underwriting standards.
No exposures in default (very wide definition).
Debtor must have made a minimum of one payment before securitisation.
Transaction performance must not be predominantly based on proceeds from sale of the assets.
Assessment of borrowers’ creditworthiness in accordance with CCD.
Portfolio transferred via true sale with no severe claw back provisions.
No discretional active portfolio management.
Homogeneous portfolio, including prepayment characteristics.
Defined portfolio periodic payment streams and proceeds from sale.
No securitization positions in the portfolio.
Regelverk frem til 2016
• Finansieringsvirksomhetsloven hadde egne verdipapiriseringsregler som bl.a. regulerte forholdet mellom kredittinstitusjoner og spesialforetak for verdipapirisering, og unntok spesialforetakene fra krav om konsesjon, kapitaldekning og tilsyn.
• Verdipapiriseringsreglene ble opphevet 1. januar 2016. Det ble ikke vedtatt noe forbud mot verdipapirisering, men uten særlige regler for spesialforetakene anses de for å drive finansieringsvirksomhet og er underlagt alle krav som gjelder for slik virksomhet. Det innebærer i realiteten at en ikke kan drive tradisjonell verdipapirisering gjennom norske spesialforetak, ettersom det ikke er mulig fullt ut å overføre risikoen til investorene.
Forordning (EU) 2017/2402
• Fastsetter et generelt regelverk for verdipapirisering, og gjelder institusjonelle investorer, långivere, spesialforetak for verdipapirisering og kredittinstitusjoner og verdipapirforetak som etablerer verdipapirisering.
• De nye reglene skal gjelde for instrumenter som utstedes i verdipapiriseringer fra 1. januar 2019 i EU. Forordningen antas å være EØS-relevant, men er ennå ikke innlemmet i EØS-avtalen.
• EUs kapitalkravsregelverk for bank og forsikring (CRR og Solvens II) er vedtatt tilpasset verdipapiriseringsforordningen med virkning fra 1. januar 2019.
• Målet med EUs verdipapiriseringsforordning er å harmonisere reguleringen av verdipapirisering i det indre markedet, og gir derfor bare et begrenset rom for nasjonale tilpasninger. Det vil imidlertid være behov for å vurdere nødvendige konsekvenstilpasninger i norsk rett, gitt at forordningen tas inn i EØS-avtalen. Det kan også være behov for å supplere forordningen med nye nasjonale regler.