Securitisations Article 242-270 CRR

The underlying idea behind a securitisation is to bundle together a pool of assets, repackage them as tradable securities and place them in the capital market. This allows firms to sell their customer exposures, obtain funding from the capital market and invest the proceeds. Banks use securitisation for, amongst other things, funding, own funds relief, credit risk mitigation and portfolio management.

In order to ensure that risks stemming from securitisations are adequately reflected in an institution's own funds requirements, the Securitisation Framework of the EU (consisting of the Capital Requirements Regulation (CRR) and the Securitisation Regulation) mandates a risk-sensitive and prudentially sound treatment of these transactions and investments.

The concept of securitisation was defined for this purpose such that it captures any transaction or scheme whereby the credit risk associated with an exposure or pool of exposures is tranched such that;

  1. payments in the transaction or scheme are dependent upon the performance of the exposures;
  2. the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme.

Own funds requirements for securitisations are calculated using an internal model-based approach or under either a standardised or ratings-based approach. Moreover, so called re-securitisation exposures (“securitisation of securitisations”) are given a greater risk weight.

The general distinction between three types of securitisation is made:

  • “traditional” securitisation, in which the exposures are sold or transferred to third parties in their entirety;
  • “synthetic” securitisation, in which only certain tranched risks are transferred through a third-party guarantee; and, lastly,
  • asset-backed commercial paper (ABCP) programmes, in which a large number of bundled securities are placed, through a securitisation special purpose entity (SSPE), on the capital market as short-dated commercial paper.

Moreover, the Securitisation Frameworkregulates other requirements alongside own funds requirements, e.g. that the interests of firms and banks which “repackage” loans into tradable securities through securitisation (originators or sponsors) and those of firms and banks which invest in these securities or instruments (investors) are aligned. To ensure this, it is therefore important for the originators or the sponsors to retain exposure to the risk of the loans in question.

Now that the Basel Committee, in response to the financial crisis, has revised its securitisation framework (“Basel III finalisation”), this has been transposed into European law in two Regulations published in the Official Journal on 28 December 2017: