I. Significant risk transfer
If originator institutions transfer a significant portion of the credit risk through securitisation, they no longer need to hold any risk-weighted capital for the loans they securitised. The required risk-weighed capital will then be calculated on the basis of the securitisation framework. See Articles 242 ff. of the CRR.Please refer to the public guidance on the recognition of significant credit risk transfer of the SSM for more information about the process of assessing SRT transactions.
This document describes the notification requirements and the information that banks need to supply in the context of SRT securitisations, the assessment and monitoring processes for SRT securitisations and the communication between the supervisory authority and the originator institution.
II Retention and due diligence
Articles 405 and 409 of the CRR impose a "retention requirement": Banks and investment firms that originate securitisations are required to retain a minimum share of the risk exposure arising from those securitisations. Banks and investment firms that invest in securitisations are responsible for verifying that originator institutions do in fact satisfy the "retention requirement".
Articles 406 and 408 of the CRR impose "due diligence" requirements: Banks and investment firms are expected to carry out thorough risk analyses of the securitisation positions they invest in. They must demonstrate that they have performed such an analysis on the basis of formal procedures and that they have policies in place that enable them to do so, as well as analysis documentation. The requirement for investors to be aware of the risks arising from their investments in securitised loans does not discharge the originator institution of the duty to have and update such awareness.
For more information on both requirements, please refer to the EBA "Final draft RTS on the retention of net economic interest and other requirements related to exposures to transferred credit risk (Articles 405, 406, 408 and 409) of the CRR".
A) Retention requirement
The retention requirement is satisfied if the originator, sponsor or original lender has explicitly informed the investing institution that it, the originator, permanently retains a material net economic interest of at least 5% in the securitisation concerned. This requirement is laid down in Article 405 of the CRR, which recognises five possible ways to hold a material net economic interest of at least 5%:
- Retention of no less than 5% or the nominal value of each of the tranches sold or transferred to the investors (the "vertical slice");
- In the case of securitisations of revolving exposures, retention of the originator's interest of no less than 5% of the nominal value of the securitised exposures;
- retention of randomly selected exposures, equivalent to no less than 5 % of the nominal value of the securitised exposures, where such exposures would otherwise have been securitised in the securitisation, provided that the number of potentially securitised exposures is no less than 100 at origination;
- retention of the first loss tranche and, if necessary, other tranches having the same or a more severe risk profile than those transferred or sold to investors and not maturing any earlier than those transferred or sold to investors, so that the retention equals in total no less than 5% of the nominal value of the securitised exposures (the "horizontal slice");
- retention of a first loss exposure not less than 5% of every securitised exposure in the securitisation.
B) Due diligence requirement
Banks and investment firms must, for each of their individual securitisation positions, be able to demonstrate to DNB that they possess a comprehensive and thorough understanding of the risk profile of these investments.They must have formal policies and procedures in place for analysing and establishing the risks involved. These procedures must also include stress tests and must be appropriate to their trade and non-trade portfolios and the risk profile of their investments in securitised positions.
With respect to individual securitisation positions, institutions must in any event be aware of:
- the manner in which originators, sponsors or original lenders in a particular securitisation satisfy the retention requirement;
- the risk characteristics of the individual securitisation position;
- the risk characteristics of the exposures underlying the securitisation positions;
- the reputation and loss experience in earlier securitisations of the originators or sponsors in the relevant exposure classes underlying the securitisation position;
- all the structural features of the securitisation that can materially impact the performance of the institution's securitisation position, such as the contractual waterfall and waterfall-related triggers.
- the statements and disclosures made by the originators or sponsors, or their agents or advisers, about their due diligence on the securitisation and the securitised exposures and, where applicable, on the quality of the collateral supporting the securitised exposures;For the complete provisions regarding retention, see Articles 406 and 408 of the CRR.
C) Assessment by the supervisory authority
The SSM takes sample surveys to assess whether banks investing in securitised loans meet the relevant requirements, including those with regard to retention and due diligence. As your SSM contact, DNB will contact you well in advance if your bank is selected for the sample survey.