Consultant Zone

NPL securitisations and the implementation of Basel standards

Chief Risk Officers, and those with compliance oversight responsibilities, often use regulator consultation papers [‘CP’] as useful documents to plan for and get ahead of the game in respect of a regulator’s direction of travel.  CP 10/21 is no exception, as it sets out the PRA’s future thinking on the implementation of the Basel standards for non-performing loan [‘NPL’] securitisations and proposes changes to the associated capital treatment.

Securitisations are an important element in financial markets, and the recent RMBS securitisations by UK specialist lenders prove the point [see our previous blog].  Securitisations allow the diversification of funding sources and release regulatory capital that can be reallocated to additional lending.  The PRA acknowledges the importance of these mechanisms, and the CP focuses on 3 areas;

(1) A definition of non-performing exposure [‘NPE’], securitisations and qualifying NPE securitisations.  The plan is to define NPE securitisations as those backed by a pool of NPEs that make up, at minimum, 90% of the entire pool’s nominal value at origination, and at any later stage when assets are added or removed from the underlying pool.  Setting the minimum below 100% allows firms to securitise exposures that either become re-performing in the process of preparing the transaction, or to include those they expect to become non-performing after it.

(2) Revised rules for calculating capital requirements on exposures to NPE securitisations.  To comply with its ‘safety and soundness’ objective, it proposes to implement a 100% risk weighting floor for all tranches of NPE securitisations, unless the firm uses an external ratings-based approach.

(3)  An update of its supervisory statement to include an expectation that compliance oversight within a firm’s Senior Management Function should ensure that appropriate assets are included in NPE securitisations.  This is to ensure that firms’ checks and balances are updated to reflect these requirements.  

The final rules will not be implemented until January 2022, giving firms 4 months warning of the regulator’s direction of travel.  

We will be happy to discuss the CP and the RMBS market in general at ABS 2021, in London 27/28 September, where we are a confirmed sponsor.  Whether an originating lender, funder, or purchaser give us a call to see how we can help or come and meet us in person in September.