UK goes own way on securitisation capital rules
The Prudential Regulatory Authority has laid out a few areas where the UK could diverge from the European Union on capital requirements for securitisations as it looks to balance competitiveness with safety while implementing the final Basel III rules.
The UK regulator appears to be in no rush – market participants were surprised when it came out with a discussion paper rather than a fully-fledged consultation on Tuesday – but that could work to its advantage as it seeks to position the UK as an attractive place outside the EU for securitisation and banking more generally.
A complex legislative process and regimented timetable forced the EU to act earlier, while the US authorities have given market participants until November 30 to comment on their proposed rules. In the UK, they have until January 31 to respond to the discussion paper before the real consultation even begins.
The UK will begin to phase in the so-called Basel endgame from July 2025, having recently moved the date back by six months, matching the timetable in the US.
“They’re in the perfect spot to get their regulation where they want it to be,” said a regulatory official at one bank. “They can afford to look in both directions, wait until the EU and US finalise their rules . . . and it doesn’t always mean they will do something better – lower regulation – but it means they can make a decision based on competitiveness.”
Output flaw
The new rules being formulated by the PRA will replace parts of the UK’s capital requirements regulation, which is in the process of being repealed and replaced following the country’s official departure from the EU almost four years ago, in January 2020.
Since that date, the EU has made several changes to the capital rules for securitisation in an attempt to make the market work better and address problems due to Basel III, especially the so-called output floor, a measure designed to reduce inconsistencies in the capital treatment of securitisation.
In June, after the securitisation industry had warned that the output floor could torpedo deals designed to free up capital on banks' balance sheets, a proposal to soften its impact was accepted in discussions between the European Parliament, the European Commission and the Council of the EU.
The proposal, known as the Boyer amendment after the French MEP Gilles Boyer who sponsored it, waters down the output floor by reducing a parameter known as the p-factor, but only in specific cases where the output floor would otherwise make capital relief deals untenable.
The PRA on Tuesday signalled that it would take a different tack. “The PRA considers that it would be better to consider whether to address any such issues by means of a targeted adjustment to the [standardised approach to calculating risk-weights] than to modify the output floor methodology,” it said.
This could still entail a reduction of the p-factor, but it would apply to the whole capital requirements framework, rather than just the output floor calculations. The PRA is also considering fine tuning the p-factor for securitisations with different features, perhaps by means of a look-up table or a formula.
Shaun Baddeley, who leads on securitisation regulatory reform at the Association for Financial Markets in Europe, said the lobby group was fully supportive of a wider review of the calculation of bank capital for securitisation.
"It has become evident over the past few years, through using these approaches, that they are blunt tools that have scope to be a lot more risk sensitive," he said. "When refined, more capital will be unlocked and channelled to finance the real economy.”
Synthetic proposition
While the PRA is focused on competitiveness and growth, in line with its recently adopted secondary objectives, it also signalled that it will not be taking an indiscriminately market-friendly approach.
Another change to the EU’s securitisation framework since 2020 has been the roll-out of the simple, transparent and standardised label, which conveys favourable capital treatment and was previously only applicable to true-sale securitisations, to synthetic transactions as well.
The EU's extension of the STS label to synthetic deals was pushed through in 2020 as part of the Capital Markets Union Action Plan developed in response to the Covid-19 pandemic. "There was very little analysis, very little thinking," said the regulatory official. "There was a window and everyone pushed whatever was top of mind."
The PRA said it did not agree with the move. It argued that since synthetic securitisations were highly bespoke, it was unclear to what extent they could be standardised, and that investors in such deals were unlikely to appreciate additional transparency. It also said expanding the STS framework would likely place considerable demands on its resources.
“The point is they didn’t have to extend STS to synthetics,” said the regulatory official. “There was no constituency asking for it. In Europe there was.”