UNIVERSITY OF AMSTERDAM
LL.M. THESIS
SECURITISATION AND SME FINANCE
To what extent the adopted framework for revitalisation of
securitisation in Europe is improving SME access to finance?
Master’s program in Law & Finance Name: Alīna Kalviša E-mail: alina.kalvisa@gmail.com Student number: 12864005 Supervisor: Jennifer de Lange-Collins Date: 24 July 2020
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ABSTRACT
Securitisation is a special financing technique which is often associated with financial crisis of 2007-2008. However, if not misused, securitisation can offer benefits for economy.
In 2015 the European Commission adopted an Action Plan that included key measures to achieve a true single capital market in the European Union – the Capital Markets Union. One of the measures of the Action Plan was to revitalize the securitisation market. The Action Plan emphasised that revived securitisation market would especially benefit SMEs – companies that are considered to be backbone of Europe’s economy and yet are highly dependent on bank financing. As a result, in 2017 a securitisation framework consisting of the Securitisation Regulation and Amendments to the Capital Requirements Regulation was adopted.
This thesis aims to analyse to what extent the adopted framework for revitalisation of securitisation in Europe is facilitating SME access to finance. Thus, this thesis analyses the concept of securitisation, ways how it can improve SME access to finance through SME related securitisation, issues that were faced by SME related prior to adoption of the new framework and whether these issues have been solved by the framework.
Thesis concludes that while the new framework it has solved some of the determined issues faced by SME related securitisation, multiple issues remain unsolved and some new have been created.
Keywords: SMEs, Capital Markets Union, securitisation, ABCP programmes, STS
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TABLE OF CONTENTS
ABSTRACT... 2 TABLE OF CONTENTS ... 3 1. INTRODUCTION ... 4 2. SECURITISATION IN EUROPE ... 62.1. CONCEPT AND BENEFITS OF SECURITISATION ... 6
2.2. FALL AND RE-EMERGENCE OF SECURITISATION ... 9
3. SECURITISATION AND SME FINANCING... 13
3.1. SMEs, THEIR ROLE IN EUROPE AND ACCESS TO FINANCE ... 13
3.2. SECURITISATION AS SME FINANCING TOOL ... 16
3.2.1. SECURITISATION AND SME LOAN SECURITISATION ... 17
3.2.2. ASSET BACKED COMMERCIAL PAPER PROGRAMMES ... 18
3.3. SME RELATED SECURITISATION ISSUES ... 20
3.3.1. REGULATORY CAPITAL REQUIREMENTS ... 20
3.3.2. SPECIFICS OF THE UNDERLYING ASSET POOL ... 21
3.3.3. MARKET ENTRY BARRIERS FOR SMEs AND BANKS SERVICING SMEs ... 22
4. REVIVAL OF EU SECURITISATION MARKET ... 24
4.1. BRIEF OVERVIEW OF THE NEW FRAMEWORK ... 24
4.2. SECURITISATION FRAMEWORK AS A TOOL FOR ADDRESSING ISSUES RELATED TO SME FINANCING ... 27
4.2.1. AMENDMENTS TO REGULATORY CAPITAL REQUIREMENTS ... 27
4.2.2. CONSIDERATION OF THE SPECIFICS OF THE UNDERLYING ASSET POOL ... 30
4.2.3. MARKET ENTRY BARRIERS FOR BANKS SERVICING SMEs AND SMEs ... 33
4.2.4. STS FRAMEWORK FOR SYNTHETIC SECURITISATION ... 34
4.3. ADDITIONAL NOTES ON THE FRAMEWORK ... 38
5. CONCLUSION ... 40
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1. INTRODUCTION
In 2015 the European Commission (EC) adopted an Action Plan1 (the Action Plan) that
included key measures to achieve a true single capital market in the European Union (EU) – the Capital Markets Union (CMU). One of the aims of the Action Plan was to revitalise the securitisation market. Securitisation is a special financing technique which is often associated with financial crisis of 2007-2008 (the Crisis), however, if not misused, it can offer benefits for economy.2
The Action Plan emphasised that revived securitisation market would especially benefit small and medium sized enterprises (SMEs). SMEs are considered to be backbone of Europe’s economy representing 99% of all businesses3 and yet are highly dependent on bank financing
with all the consequences that follows, including facing difficulties to obtain financing, especially during negative cyclical phases4, as was proved during the Crisis5.6
Following the ideas laid down in the Action Plan, a legislative package consisting of the Securitisation Regulation7 (the SR) and Amendments to the Capital Requirements Regulation8
(Amendments to the CRR), both together further referred to as the Framework, was adopted in 2017.
1 ‘COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Action Plan on Building a Capital Markets Union COM/2015/0468’ <https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52015DC0468> accessed 29 March 2020. 2 European Parliament, ‘Understanding Securitisation’ (2015) <https://www.europarl.europa.eu/RegData/etudes/IDAN/2015/569017/EPRS_IDA%282015%29569017_EN.pdf >, accessed 24 June 2020.
3 ‘Entrepreneurship and Small and Medium-Sized Enterprises (SMEs)’ <https://ec.europa.eu/growth/smes_en>, accessed 10 April 2020.
4 Patrizio Messina, Finance for SMEs: European Regulation and Capital Markets Union: Focus on Securitization and Alternative Finance Tools (Wolters Kluwer 2019), 17.
5 Ewald Engelen and Anna Glasmacher, ‘The Waiting Game: How Securitization Became the Solution for the Growth Problem of the Eurozone’ [2018] Competition and Change.
6 Chapter 3.1. will provide more detailed explanation of difficulties SMEs face regarding access to finance. 7 ‘Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 Laying down a General Framework for Securitisation and Creating a Specific Framework for Simple, Transparent and Standardised Securitisation, and Amending Directiv’ <https://eur-lex.europa.eu/legal-content/en/TXT/?uri=celex:32017R2402> accessed 11 April 2020.
8 Regulation (EU) 2017/2401 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms.
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The research question of this thesis is to what extent the adopted Framework for revitalisation of securitisation in Europe is improving SME access to finance. Thus, this thesis will be an evaluative research analysing ways securitisation can benefit SMEs and the Framework from perspective of it facilitating SME access to finance.
The structure of this thesis is as follows: Chapter 2 will take a look at the concept of securitisation, explain its ties with the Crisis and benefits it can offer. Chapter 3 will look at SMEs, their role in EU, ways how securitisation can benefit their access to finance and issues SME related securitisation faced. Chapter 4 will provide a brief overview of the adopted Framework and analyse its impact on the issues determined in Chapter 3, as well as will look at the, proposed legal framework concerning synthetic securitisations and its potential benefit to SMEs. The analysis will be followed by conclusion in Chapter 5.
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2. SECURITISATION IN EUROPE
Securitisation is a special financing technique which is often associated with financial crisis of 2008 (the Crisis), although it was not directly responsible for it and, if not misused, can even offer benefits.9 This chapter will analyse the concept of securitisation, its ties with the Crisis
and possible reasons for need of its revitalisation.
2.1. CONCEPT AND BENEFITS OF SECURITISATION
In EU law the definition of securitisation can be found in Article 2 (1) of the SR, where securitisation is defined as a ‘transaction or scheme, whereby the credit risk associated with an exposure or a pool of exposures is tranched, having the following characteristics: payments in the transaction or scheme are dependent upon the performance of the exposure or of the pool of exposures; the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme’10.
The main participants in the securitisation process are originators11, the securitisation special purpose entities (SSPEs)12, investors13 and credit rating agencies, however there are other
parties involved providing various transaction support services.
9 European Parliament, ‘Understanding Securitisation’ (2015) <https://www.europarl.europa.eu/RegData/etudes/IDAN/2015/569017/EPRS_IDA%282015%29569017_EN.pdf >, accessed 24 June 2020.
10 ‘REGULATION (EU) No 575/2013 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 26 June 2013 on Prudential Requirements for Credit Institutions and Investment Firms and Amending Regulation (EU) No 648/2012’ <https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02013R0575-20191225> accessed 13 April 2020.
11 Article 2(3) of the SR defines the originator as an ‘entity which self or through related entities, directly or indirectly, was involved in the original agreement which created the obligations or potential obligations of the debtor or potential debtor giving rise to the exposures being securitised; or purchases a third party’s exposures on its own account and then securitises them’.
12 Please note that some sources use term ‘special purpose vehicle’ or ‘SPV’ instead of SSPE. SSPE is defined in Article 2 (2) of the SR as ‘corporation, trust or other entity, other than an originator or sponsor, established for the purpose of carrying out one or more securitisations, the activities of which are limited to those appropriate to accomplishing that objective, the structure of which is intended to isolate the obligations of the SSPE from those of the originator’.
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Simple outline of the process is as follows: the originator transfers its financial assets to bankruptcy remote14 SSPE who sells investors different categories15 of securitisation notes the underlying asset of which is the transferred financial asset (e.g. a loan). With the funds raised from the investors the SSPE makes an upfront payment of the assets’ cash flows to the originator, usually bank.16 Later the SSPE uses cash flows – payment instalments that are generated by the underlying loans to pay the investors holding securitisation notes as well as to pay other involved parties for their services.17
The below scheme is a visualisation of the provided simple description of the process.18
It should be noted that the above is a description and visualisation of a true sale securitisation (i.e. where the financial asset is really transferred to the SSPE). Securitisation can also be synthetic, i.e. ‘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’19. Meaning, while in true sale (also called – traditional) securitisation the ownership
14 Bankruptcy remoteness in essence means that bankruptcy of the originator would not leave impact on investors being paid from the cashflows of the underlying assets.
15 These would normally be senior, mezzazine and junior, with junior category bearing the most risk and senior category having the less risk of not getting paid. Credit rating agencies provides credit rating for securitisation notes of each category. For more please see: European Parliament (n 2).
16 ibid. 17 ibid.
18The visualization has been inspired by the visualization provided in the following source: GCR ratings,
‘Securitisation 101’ (2019)
<https://gcrratings.com/wp-content/uploads/2019/09/GCR-Research-Securitisation-101_final.pdf>.
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of the underlying exposure is being transferred20, by using the synthetic model only the credit
risk related to the underlying exposures is being transferred, thus introducing an additional counterparty credit risk, as well as potential complexity related to the content of the derivative contract21. Synthetic securitisation will be further discussed in Chapter 4.2.4.
Securitisation offers multiple benefits for the originators22. Firstly, as the assets are sold to the SSPE and the bank receives a payment for their value, the bank has now funds available to finance new projects; secondly, the credit risk is transferred off the balance sheet of the bank – as a result the bank is not liable for the possible losses that the assets may suffer, therefore the regulatory capital that has to be held against these assets is reduced.23 However, as we will see in next chapters, the banks as originators have obligations to retain some part of interest to the securitised asset, leaving impact to required regulatory capital.
The idea behind the regulatory capital requirements is that bank’s shareholders’ equity and other long term liabilities should fund a proportion of the bank’s asset current value in order to increase the probability that in case of losses on the assets side of the balance sheet the bank will be able to absorb them the bank without becoming insolvent or triggering its clients to withdraw deposits or other types of short term funding.24 As a simple example, if the bank has issued loans worth EUR 100 and the regulatory capital requirement is 5%, it means that bank has to finance EUR 5 worth of the loan with shareholders’ equity (i.e. hold EUR 5 worth of equity) and the rest EUR 95 can be financed by other means – deposits etc.25 The riskier assets on
down a General Framework for Securitisation and Creating a Specific Framework for Simple, Transparent and Standardised Securitisation, and Amending Directiv’ (n 15), article 2 (10).
20 ‘Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 Laying down a General Framework for Securitisation and Creating a Specific Framework for Simple, Transparent and Standardised Securitisation, and Amending Directiv’ (n 15), article 2 (9).
21 ibid, recital 24.
22 Originators in most cases are banks therefore where the context is appropriate any of these terms will be used further on. Bank is to be understood as a credit institution in accordance with Regulation (EU) no 575/2013. 23 Steven L Schwarcz, ‘Securitisation and Structured Finance’ (2011) <https://masonlec.org/site/rte_uploads/files/SCHWARCZ_Encyclopedia-of-Financial-Globalization-Elsevier.pdf >, accessed 24 June 2020.
24 John Armour and others, Principles of Financial Regulation (Oxford University Press 2016), 296.
25 This is a very simple explanation. The actual required capital can be composed by not only equity but different tiers of capital on bank’s liability side of the balance sheet. For more on the topic please see: John Armour and others, Principles of Financial Regulation (Oxford University Press 2016), Chapter 14.
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bank’s asset side of the balance sheet, the higher is the capital requirement, thus more capital bank is required to hold.26
On international level, regulatory capital requirements, among other banking sector’s regulatory standards, are included in the so called Basel Framework issued by the Basel Committee on Banking Supervision (BCBS) which is the main global standard setter for the prudential regulation of banks27. In Europe these Basel Framework standards are implemented by such EU level regulatory acts as the CRR which provides general prudential requirements for credit institutions and investment firms28 as well as Capital Requirements Directive29.
2.2. FALL AND RE-EMERGENCE OF SECURITISATION
Securitisation is not a new mechanism, it has been used as a financing tool for a long time, however, the Crisis significantly damaged the reputation of securitisation.30 The initiator of the Crisis was performance of subprime mortgage securitisations in the United States (the US) where residential mortgage-backed securities experienced high default rates.31 It turned out that the cash flow assumptions were wrong and the respective securities defaulted or their credit rating was downgraded, which, among causing other issues, affected investor confidence in securitisation products.32
26 Armour and others (n 21), 296.
27 More information on BCBS available: https://www.bis.org/bcbs/index.htm, accessed 30 June 2020.
28 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012., article 1. 29 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC.
30 Miklós Vörös, ‘European Securitization at the Regulatory Crossroads’ (2019) <https://www.msci.com/www/blog-posts/european-securitization-at-the/01521347078>.
31 Miklós Vörös, ‘European Securitization at the Regulatory Crossroads’ (2019) <https://www.msci.com/www/blog-posts/european-securitization-at-the/01521347078>, accessed 10 May 2020. 2020.
32 Steven L Schwarcz, ‘Securitization and Post-Crisis Financial Regulation’ <https://scholarship.law.duke.edu/faculty_scholarship/3558>, accessed 26 June 2020. This paragraph provides very brief summary of the relationship between securitisation and the financial crisis of 2007-2008, for more information please see, for example: Ewa Szabłowska, ‘The Financial Crisis and Securitization’ (2010) 2010 Journal of Education Culture and Society.
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While the default numbers in the EU were much lower than in the US, the Crisis left consequences also to the EU securitisation market and its reputation.33 Moreover, these consequences were more long lasting than in the US market: since the Crisis the securitised amounts had dropped by one third to €1.5 trillion by the end of 2013 – the EU securitisation market failed to recover in contrast to the US market.34
However, the situation in the EU securitisation market was caused not only by the Crisis itself, but partly also by the regulatory measures in the EU, including regulatory capital requirements, that were adopted as a response to the Crisis and which gave rise to certain disincentives to issue and invest securitisations.35
In years following the Crisis the EC, as well as multiple industry bodies emphasized the necessity of policy measures reconsidering the treatment of securitisations36. For example, International Monetary Fund (IMF) Staff Discussion Note37 produced in 2015 indicated that ‘a well-functioning and liquid securitization market is a promising avenue to enhance the lending capacity of banks and permanently broaden funding options for SMEs while supporting greater integration of European capital markets’38.
Significant milestone for revival of the securitisation market was achieved in 2015 when the EC adopted Action Plan39 laying down key measures to achieve a true single capital market in
the EU. The document explains that strengthening Europe’s economy and stimulating investment to create jobs can be achieved by creating a true single capital market – the CMU for all member states - which would lead to efficiency gains and back up Europe’s ability to finance growth.40 33 Vörös (n 30). Accessed 10 May 2020. 34 European Parliament (n 2). 35 Kastelein (n 24), 468. 36 ibid.
37 Shekhar Aiyar and others, ‘Revitalizing Securitization for Small and Medium-Sized Enterprises in Europe’ (2015), 4.
38 Shekhar Aiyar and others, ‘Revitalizing Securitization for Small and Medium-Sized Enterprises in Europe’ (2015), 4.
39 ‘COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Action Plan on Building a Capital Markets Union COM/2015/0468’ <https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52015DC0468> accessed 29 March 2020. 40 ibid.
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The key functions laid down in the Action Plan are creation of stronger capital markets is meant to supplement Europe’s tradition of bank financing as well as simultaneously connect available capital with investment opportunities across EU, including SMEs; the CMU is aimed at helping SMEs to raise financing as easily as it is for large companies, stabilising the financial system, deepening financial integration and boosting competition41.
The capital markets can be described as a marketplace where persons who have financial capacity can meet persons in need for long-term or short-term capital, as well as a place that offers means for shifting financial risk from one party to another party who is more willing or able to take on that risk.42 Participation in the capital markets is carried out through trading of financial instruments, such as stocks and bonds, although also more complex instruments exist.43
Securitisation in particular is one of the more complex tools how to raise funds within capital markets and securitisation has the potential to mitigate the pressure on bank lending by banks being able to use it as a market based means of risk transfer.44
The Action Plan envisaged securitisation as a way to leverage the banking sector’s capacity to support wider economy by freeing up capacity on banks’ balance sheets, increasing their ability to issue new loans, as well as to grant investment opportunities for long term investors45. As a reason why it is worth to revive securitisation market introductory part of the Action Plan especially emphasised a particular group that would especially benefit from revitalisation of securitisation: SMEs. According to the Action Plan, if EU securitisations would be revived to pre-crises levels, banks could provide the private sector with additional credit of more than
41 ibid.
42 Alan Rechtschaffen, Capital Markets, Derivatives and the Law (Oxford University Press 2009) <https://search.ebscohost.com/login.aspx?direct=true&db=e000tww&AN=369094&site=ehost-live&scope=site >, 14, accessed 26 June 2020.
43 ibid.
44 Bank of England and European Central Bank, ‘The Case for a Better Functioning Securitisation Market in the
European Union’ (2014)
<https://www.ecb.europa.eu/pub/pdf/other/ecb-boe_case_better_functioning_securitisation_marketen.pdf>, accessed 30 June 2020.
45 Gerard Kastelein, Securitization in the Capital Markets Union: One Step Forward, Two Steps Back (Oxford University Press 2018), 466.
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EUR 100 billion and if SME securitisation would return to half of what it was at financial crisis, additional funding of EUR 20 billion would be generated.46
Therefore the next chapters will focus on SMEs, determine ways how securitisation can provide benefits to SME finance, issues SME related securitisation was facing and analyse whether the framework aimed at implementing the Action Plan and revival of securitisation - the adopted Framework solved these issues.
46 ‘COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Action Plan on Building a Capital Markets Union COM/2015/0468’ (n 1).
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3. SECURITISATION AND SME FINANCING
SMEs often are referred to as the backbone of economy.47 This chapter will discuss the
concept of SMEs, their importance in Europe, the role securitisation can play on SME access to finance and issues that were faced by involved parties before adoption of the Framework.
3.1. SMEs, THEIR ROLE IN EUROPE AND ACCESS TO FINANCE
Before analyzing the role that securitisation can have on SMEs, it is first needed to clarify the concept of what is generally understood with a term ‘SME’. The legal concept of SME differs around the world while as regards the EU, the general concept is provided in the Commission Recommendation 2003/361 (the Recommendation)48. Article 2 of the Recommendation
states that ‘the category of micro, small and medium-sized enterprises49 is made up of
enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million50’.
From the above we can conclude that to be considered as a SME, an enterprise needs to comply with criteria related to the maximum number of employees, as well as at least one criteria related to the financial results of the enterprise.
The Recommendation further divides the general SME category into sub-categories of micro, small and medium sized enterprises.51 In fact, 93% of SMEs in EU are micro enterprises52,
meaning, that their number of employees is lower than 10 and annual turnover or balance
47 ‘Entrepreneurship and Small and Medium-Sized Enterprises (SMEs)’ (n 3).
48 ‘Commission Recommendation of 6 May 2003 Concerning the Definition of Micro, Small and Medium-Sized Enterprises’ <https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:32003H0361> accessed 29 March 2020.
49 As regards the concept of enterprise, Article 1 of the Commission Recommendation 2003/361 defines that ‘an enterprise is considered to be any entity engaged in an economic activity, irrespective of its legal form. This includes, in particular, self-employed persons and family businesses engaged in craft or other activities, and partnerships or associations regularly engaged in an economic activity’. Therefore the definition covers wider range of subjects than only legal entities formed as e.g. limited liability companies.
50 ‘Commission Recommendation of 6 May 2003 Concerning the Definition of Micro, Small and Medium-Sized Enterprises’ (n 48).
51 ibid.
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sheet total does not exceed EUR 2 million.
The criteria for each subcategory are summarized in the table below:
Category Number of
employees
Annual turnover Balance sheet total
Micro Less than 10 EUR 2 million or less
EUR 2 million or less
Small Less than 50 EUR 10 million or less
EUR 10 million or less
Medium Less than 250 EUR 50 million or less
EUR 43 million or less
While the general concept of what is understood with SMEs in EU is laid down in the Recommendation, some legislative acts53 include adapted SME definitions for purposes of
their interpretation. Therefore, before interpretation and application of any legislative act it is important to check whether there are any SME definition specifics of that particular act to be applied. As regards the legislative acts that are related to the topic of this thesis, as we will see further on, the CRR refers to the definition provided in the Recommendation.
Considering the SME importance for the economy, one might assume that SMEs are in a good position to attract the capital necessary to fund their activities. However, according to the EC the reality seems to be different - access to finance has been one of the most significant difficulties for the establishment, survival and growth of SMEs54.
The classic prominent forms of company funding that have been around for years are debt and equity.55 The owners of European SMEs mostly are family members56 and SMEs tend to
53 For example Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC and Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.
54 Oecd, ‘The Impact of the Global Crisis on SME and Entrepreneurship Financing and Policy Responses’ [2009] Policy, 3., also: ‘Communication from the Commission An Action Plan to Improve Access to Finance for SMEs’ <https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52011DC0870>.
55 Rick Watson and Jeremy Carter, Asset Securitisation and Synthetic Structures: Innovations in the European Credit Markets (Euromoney Institutional Investor 2006), 3.
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choose to not attract external equity capital57, meaning that SME access to equity finance is
often limited to what the shareholders have to offer.
As regards debt financing, although in recent years have there has been a considerable increase in nontraditional financing options (for example, such fin-tech activities as peer-to-peer lending platforms), banks are still providing most of the necessary funding for SMEs’ growth.58 Therefore, SMEs mostly depend on bank finance.59
The issue is that banks often are reluctant to lend to SMEs, as they consider such loans risky and doubt SME ability to repay the loan60. While obtaining loans can be cumbersome already in normal times, the problem becomes more serious during times negative cyclical phases when credit offer gets lowered to minimum.61
As an example, after the Crisis banks were occupied rebuilding their balance sheets, which deteriorated their ability to finance the real economy: SMEs62. This means that during and after the financial crisis SMEs experienced multiple challenges: they had to deal with not only crisis related to decrease in demand for the products or services they offer, but also with tightening in credit conditions (for example, increase of the required level of collateral, decrease of loan duration, increase in the difference between the amounts requested by companies and amounts granted etc.), which severely affected their cash flows.63
To motivate bank lending to SMEs, in 2014 the CRR introduced regulatory capital requirement relief for banks that are financing SMEs64 – Article 501 states that capital requirements for
credit risk on exposures to SMEs shall be multiplied by the factor 0.7619, thus there is a deduction to the capital requirement that banks need to comply with.
57 Inês Gonçalves Raposo and Alexander Lehmann, ‘Equity Finance and Capital Market Integration in Europe’ (2019) 3 Policy Contribution <http://aei.pitt.edu/95641/1/PC-2019-03.pdf>, accessed 24 June 2020.
58 Maricica Moscalu, Claudia Girardone and Raffaella Calabrese, ‘SMEs’ Growth under Financing Constraints and Banking Markets Integration in the Euro Area’ [2019] Journal of Small Business Management 1 <https://www.tandfonline.com/doi/abs/10.1080/00472778.2019.1668722>, accessed 24 June 2020.
59 Aiyar and others (n 37). 60 Messina (n 2), 17. 61 ibid, 17.
62 Ewald Engelen and Anna Glasmacher, ‘The Waiting Game: How Securitization Became the Solution for the Growth Problem of the Eurozone’ [2018] Competition and Change, p.2.
63 Oecd (n 54).
64 The CRR recognises as SMEs companies that comply with definition laid down in the Recommendation in terms of turnover.
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However, a report65 published in 2016 by the European Banking Authority (EBA) revealed that ‘there is no evidence yet that the SME supporting factor has in fact provided additional stimulus for bank lending to SMEs compared to large corporates’66. Thus in practice this
measure did not seem to solve the issue SMEs face and additional measures needed to be found. SME possibility of becoming more solid and long-lasting businesses strongly depend on the access to financing.67 As mentioned in previous chapter, the Action Plan emphasised securitisation as one of the tools under CMU project that could improve SME access to finance.
3.2. SECURITISATION AS SME FINANCING TOOL
The Action Plan emphasized two main ways how SMEs could benefit from the CMU and facilitation of securitisation – securitisation in general or bank securitisation would allow banks to lend more money to private sector, including SMEs, while SME securitisation would provide additional 20 million of funding68. SME securitisation is said to form an important element in the efforts to enhance access to finance for SMEs and be essential in helping financial intermediaries widen their funding base, obtain capital relief and ultimately, increase their SME financing69 as in practice securitisation results in originator’s capital resources being released, thus increasing their capacity to lend more to SMEs70.
While the Action Plan seemed to distinguish the above two ways of how SMEs would benefit from the revival of securitisation market, it does not provide clear definitions of these terms so the next subchapter will look at their meaning. In addition, the second subchapter of this chapter will look at another tool that can be beneficial to SMEs which was not specified in Action Plan
65 EBA, ‘EBA Report on SMEs and SME Supporting Factor’ (2016) <https://eba.europa.eu/eba-publishes-the-report-on-smes-and-the-sme-supporting-factor>. Accessed 13 April 2020.
66 Guido Ferrarini Danny Busch, Emilios Avgouleas, Capital Markets Union in Europe (Oxford University Press 2018), 714.
67 Messina (n 4).
68 ‘Communication from the Commission An Action Plan to Improve Access to Finance for SMEs’ (n 54). 69 Helmut Kraemer-Eis and others, ‘SME Securitisation: At a Crossroads?’ (2015) December 2015 EIF Working Paper, 22.
70 ‘Evaluation of the EIF’s SME Securitisation Activities, 2004-2015’ (2017) <https://www.eib.org/attachments/ev/ev_report_eif_sme_securitisation_activities_en.pdf>, accessed 30 April 2020.
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but mentioned in later Framework consulting documents71 – Asset Backed Commercial Papers
(ABCPs).
3.2.1. SECURITISATION AND SME LOAN SECURITISATION
Concept of the term of securitisation within the Action Plan can be understood from the context and the analysis provided in previous chapter – i.e. using the previously described securitisation process as a mechanism to free up bank’s balance sheet by bank transferring its assets of unspecified type to SSPE.
However, the concept of SME securitisation is not that clear. Available sources that contain references to term SME securitisation are documents prepared by such institutions as European Investment Fund (EIF), which refers to SME securitisation as comprising of transactions backed by SME loans, leases, etc.72 Other documents, prepared by the EC, use term ‘SME loan securitisation’ to refer to securitisation of loans issued to SMEs.73
In the light of the above, it makes the most sense to think that by the previously mentioned Action Plan’s statement that the increase of SME securitisation would help to generate additional EUR 20 billion funding, was meant to refer to increase of securitisation of specific asset type – bank loans issued to SMEs.
Thus SME securitisation can be considered a subcategory of securitisation in general, referring to more specified pool of underlying assets – SME loans. For clarity purposes, when referring to securitisation the underlying assets of which are loans to SMEs, this thesis will use term ‘SME loan securitisation’. While term ‘securitisation’ will be used to refer to securitisation in general, regardless of the type of underlying asset.
As regards the potential benefits – securitisation in general, as described in previous chapter, results in banks freeing up their balance sheets and receiving funds that they can use for funding
71 ‘European Commission, “Questions on the STS Securitisation Proposal” COM (2015) 472’ <https://www.europarl.europa.eu/cmsdata/100523/2259668 Annex 2_Securitisation questions.pdf>, accessed 3 June 2020.
72 Helmut Kraemer-Eis, ‘SME Securitisation in Europe – a Short Summary’ [2017] Securitisation & Structured Finance Handbook 2018 51ff., 57.
73 ‘Roundtable between Bankers and SMEs’ <http://ec.europa.eu/DocsRoom/documents/3344/attachments/1/translations/en/renditions/pdf>, sccessed 3 June 2020.
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other projects. Thus indeed in theory the securitisation mechanism allows banks to have more money available to lend to private sector as indicated in the Action Plan.
SME loan securitisation, while having same effects as securitisation in general, can be said to be more specified towards SMEs – by securitising the loans issued to SMEs the banks are freeing up their balance sheets from SME loans therefore in theory should be more willing to lend to SMEs (knowing that loans can be securitised), as well as are able to use the new funds to issue more loans to SMEs, which then again can be securitised and so the cycle can continue. Thesis will focus more on issues related to SME loan securitisation in specific rather than securisation in general, because SME loan securitisation is a subcategory of securitisation, therefore it provides same benefits as any other securitisation as well as the abovementioned potential additional benefit.
3.2.2. ASSET BACKED COMMERCIAL PAPER PROGRAMMES
Although SMEs normally do not have direct access to the capital markets to enter into securitisation transactions with investors, ABCP programmes is a special tool that can be used by SMEs to obtain financing via securitisaton of their trade receivables.74 Benefits from entry
into such programmes are e.g. financing working capital75 and using the received funds to
repay long term debts, thus lowering borrowing costs76.
The SR defines ABCP transaction as a ‘securitisation within ABCP programme’77, which is
defined ‘a programme of securitisations the securities issued by which predominantly take the form of asset-backed commercial paper with an original maturity of one year or less’78.
The basic outline of how the ABCP securitisaton works is as follows: a company (it can be SME, as well as a large corporate etc.) enters into agreement with an SSPE79 established by
74 ‘The Fundamentals of Asset-Backed Commercial Paper’ <https://www.imf.org/~/media/Websites/IMF/imported-events/external/np/seminars/eng/2010/mcm/pdf/_Rutan1 pdf.ashx>, 11, accessed 20 May 2020.
75 ibid.
76 Charles Austin Stone and Anne Zissu, The Securitization Markets Handbook: Structures and Dynamics of Mortgage- and Asset-Backed Securities (Wiley 2012).
77 Article 2 (8). 78 Article 2 (7).
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the sponsoring bank80 and sells its trade receivables to the SSPE. The SSPE creates ABCPs
that are backed by the expected cashflows of trade receivables obtained from multiple companies and sells them to investors, using the proceeds to pay the company for the trade receivables. The company later passes the cashflows from the receivables to the SSPE for distribution to investors.81 As there are transaction and other costs for entering into ACBP
programme, the company will be normally paid for the receivables for less than their face value, thus in the end through this process the company loses part of the value of the trade receivables, but receives the most part earlier than it would receive it from its trade debitors.82
Below is a simple visualization of the above provided process description.83
From the above we can determine two main differences between regular securitisation and ABCP programme: firstly, in case of ABCPs the maturity normally, with a few exceptions, do not exceed one year while the maturity term in standard securitisation is not restricted and can
80 According to article 2 (5) of the SR ‘sponsor’ means a credit institution or investment firm that is not the originator of the transactions and: establishes or establishes and manages an ABCP programme or other securitisation that purchases exposures from third-party entities. Sponsor often provides liquidity facility which can be described as back-up line that can be used, for example, in case substantial arrears on the underlying receivables happen and the income from the assets is not enough to pay the ABCP holders. Source: Bank of England and European Central Bank (n 44).
81 More detailed explanation available, for example: ‘The Fundamentals of Asset-Backed Commercial Paper’ (n 74).
82 Stone and Zissu (n 77), 251.
83 Visualisation has been inspired from and adapted as more simplified version of visualization in the following source: ‘The Fundamentals of Asset-Backed Commercial Paper’ (n 74).
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be several years. Secondly, in ABCP securitisaton the bank is acting as a sponsor and setting up a SSPE to securitise assets that SSPE purchases from third party, while in standard case of securitisation bank sells its own assets to SSPE for securitisation.
To conclude, ABCP programmes is another way how SMEs can benefit from securitisation by getting more direct (although still bank intermediated84) access to the securitisation markets.
3.3. SME RELATED SECURITISATION ISSUES
The previous subchapter determined main ways how SMEs can benefit from securitisation: through securitisation in SME loan securitisation and through use of ABCP programmes (both together will be referred to as SME related securitisation). While there definitely are more possible issues overshadowing SME related securitisation, this chapter will discuss three main problem groups SME related securitisation faced prior to adoption of the Framework.
3.3.1. REGULATORY CAPITAL REQUIREMENTS
As was briefly discussed in Chapter 2, post Crisis regulatory developments impacted securitisation market, thus leaving impact also to securitisation of SME loans and ABCP programmes involving SME trade receivables.
Most importantly, changes of regulatory capital requirements raised disincentives for use of securitisation products as regulatory capital requirements influence decisions made by both banks and investors subject to capital requirements.85
Regardless of different performances of securitisation instruments during the financial crisis, the regulatory capital requirements did not contain enough differentiation that would take into account these different performances and thus risks.86 As a result, for example, SME loan securitisations were subject to same regulatory capital requirements as securitisations backed by residential mortgages, thus not providing incentives for SME loan securitisation.87
84 While this thesis focuses on bank intermediated use of ABCP programms to securitise SME receivables, it must be noted that large companies in some cases directly engage in securitisation of their own receivables by setting up the SSPE themselves, but this is unlikely to be relevant for SMEs due to costs of setting up appropriate infrastructure. See, for example: Andreas Jobst, ‘Asset Securitisation as a Risk Management and Funding Tool: What Does It Hold in Store for SMES?’ [2005] SSRN Electronic Journal.
85 Kastelein (n 24), 468. 86 Aiyar and others (n 38), 13. 87 Aiyar and others (n 38), 13.
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3.3.2. SPECIFICS OF THE UNDERLYING ASSET POOL
In case of SME trade receivable securitisation via ABCP programmes and SME loan securitisation, the underlying assets of the pools are SME trade receivables and loans issued to SMEs respectively. For assets to be determined as suitable for pooling, they had to comply with certain conditions, such as clean credit history, sufficient time till maturity and predictable cash flow stream, certainty on availability of collateral, as well as sufficient sectorial diversification.88
When it comes to securitising SME loans, satisfying these conditions is more difficult, for example, because there is high level of diversity in loan products themselves, as well as available collateral89. In comparison, where underlying assets are for example, residential mortgages, such aspects as loan agreements and collateral are more uniform.90
Similar considerations are applicable also in case of securitising SME trade receivables using ABCP programmes – the types and terms of contracts which generate rights to receivables can be very diverse, same applies to the identities and locations of SME’s debtors91. A typical
process of due diligence to determine asset suitability for pooling includes a review of the standard contract forms of the seller of the receivables, as well as review of samples of existing contracts that have been concluded with key customers.92 This can cause more issues for SMEs
than for large companies due to the fact that in most cases the larger the company is, more likely that its contracts will be more highly standardised as it often can be in better circumstances to have bargaining power93. As for SMEs, they might more often be forced to accept contract forms of their business partners, thus making the pool of the contracts granting rights to trade receivables comparably more diverse and that way complicating the process of due diligence and leaving impact to sponsoring bank willingness to accept receivables for pooling into SSPEs.
88 ibid.
89 ‘Roundtable between Bankers and SMEs’ (n 74), 4. 90 Aiyar and others (n 37).
91 Nick Stainthorpe, ‘Trade Receivables Securitisation’ <https://www.structuredfinanceinbrief.com/2013/06/trade-receivables-securitisation/>, accessed 5 July 2020. 92 ibid.
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Another related issue is already mentioned problem of investor confidence. One of aspects of the investor confidence is that potential investors may be dissuaded by a lack of standardisation in terms of structures, documentation, asset types etc.94 While this is relevant for securitisations of any assets, it affects SME related transactions even more because investors are less familiar with SME related underlying assets than by e.g. mortgage loans that are more dominant, standardised and better known among investors95.
Also, contracts regarding assets to be securitised may cause potential issues for securitisation. For example, contracts may include prohibition of sale or transfer of the rights and obligations of the contract, thus creating obstacles for transfer to the SSPE, which is said to be a common problem in SME loan sector.96
Finally, due to the specifics of the underlying asset pool there are several other important aspects that are taken into account by banks and investors when choosing to securitise or invest in securitisations. These range, for example, from jurisdictions having different reporting requirements that complicates credit risk assessment process to different laws regarding enforcement of claims and insolvency procedures97 which leaves impact to development of SME related securitisation market.
3.3.3. MARKET ENTRY BARRIERS FOR SMEs AND BANKS
SERVICING SMEs
The securitisation transactions are mainly carried out by large banks. 98 One of the reasons of that is the fact that the upfront costs for setting up system for securitisations are high. These costs include, for example, sunk costs, like setting up IT systems capable to handle the data, as well as costs related to pooling, drafting legal documentation, performing due diligence, obtaining credit ratings.99 While large banks might have the necessary systems in place, the
94 Bank of England and European Central Bank (n 44). 95 ibid.
96 Orçun Kaya, ‘Synthetic Securitisation Making a Silent Comeback’ (2017) <https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000441788/Synthetic_securitisation%3A_ Making_a_silent_comeback.pdf>.
97 Aiyar and others (n 37). 98 ibid.
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upfront costs leave impact to smaller bank ability to enter the market.100 However, smaller and
regional banks often are the ones having a high market share in the overall SME lending.101 Therefore smaller banks are the ones actually holding on to comparably larger SME loan portfolio and thus could be able to securitise and later issue even more loans, if being able to access the necessary systems and cover costs.
As regards use of ABCPs, it is also worth noting that although in theory ABCPs are a good tool to finance trade receivables, they are mostly used by large corporates and part of medium sized enterprises of the SME group102, not micro and small enterprises that form the largest
part of the SME group.
This could be due to the aforementioned issue that banks servicing SMEs often are not engaging in securitisation and thus would not be able act as sponsoring bank, as well as because traditionally only large amounts of SME receivables starting from EUR 50 million are accepted into ABCP programmes103. Therefore, most of the SMEs simply do not have
enough trade receivables to offer the ABCP programme.
100 Bank of England and European Central Bank (n 44). 101 ‘Roundtable between Bankers and SMEs’ (n 73).
102 Gianluca Oricchio and others, SME Funding: The Role of Shadow Banking and Alternative Funding Options (2016), 199.
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4. REVIVAL OF EU SECURITISATION MARKET
Previous chapters discussed the concept of securitisation, its potential for use as SME financing tool, as well as issues that SME related securitisation faced that needed solving. Considering that by various examples the Action Plan and other documents posed SMEs as the subjects that would significantly benefit from revitalization of securitisation, it is interesting to analyse whether these advertised benefits for SMEs are indeed somehow ensured by the Framework. Therefore, this chapter will provide a general overview of the adopted Framework aimed at revitalisation of securitisation and analyse whether it has solved any of the SME related securitisation issues identified in previous chapter.
4.1. BRIEF OVERVIEW OF THE NEW FRAMEWORK
On 12 December 2017 two main components of the legislative package aimed at promoting safe and liquid securitisation market104 were adopted in order to implement the objectives of
the Action Plan with respect to the revival of securitisations: the SR and the amendments to the CRR. The new rules have been applicable to securitisations issued as of 1 January 2019.105 The SR ‘lays down a general framework for securitisation. It defines securitisation and establishes due-diligence, risk-retention and transparency requirements for parties involved in securitisations, criteria for credit granting, requirements for selling securitisations to retail clients, a ban on re-securitisation, requirements for SSPEs as well as conditions and procedures for securitisation repositories. It also creates a specific framework for simple, transparent and standardised (STS) securitisation’106. The SR imposes obligations on institutional investors,
originators, sponsors, original lenders and securitisation special purpose entities.107
104 ‘What Is Securitisation?’
<https://ec.europa.eu/info/business-economy-euro/banking-and-finance/financial-markets/securities-markets/sec uritisation_en>, accessed 30 April 2020.
105 Article 48 of the SR and Article 3 of the amendments to the CRR.
106 ‘Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 Laying down a General Framework for Securitisation and Creating a Specific Framework for Simple, Transparent and Standardised Securitisation, and Amending Directiv’ (n 15), Article 1.
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As this thesis focuses on the legal tools that the SR potentially offers to facilitate SME access to finance, thesis will not offer a detailed description of all rules introduced by the SR. However, to shortly summarize the main points – the SR imposes restrictions and obligations on investors108, consolidates and harmonises previously existing109 risk retention and credit granting requirements110 , determines transparency requirements 111 , imposes ban on re-securitisation112 and creates STS securitisation framework. While the rules applicable to all securitisations are generally consolidated and amended versions of already previously existing rules, the special STS framework is a new, special securitisation label created by the SR. The general idea of STS, also called high-quality securitisation, is broadly conceived as including simpler structures with underlying assets that are transparent and has predictable of risks and performance.113 Securitisations that comply with requirements of STS transactions determined in SR can be notified to the European Securities and Markets Authority (ESMA) and thus be included in STS securitisation data base and receive STS label.
The SR distinguishes two different types of STS requirements – requirements applicable to standard long term securitisations and STS requirements applicable to short term securitisations - ABCPs. Next few paragraphs will provide a brief summary of the STS requirements.
As for long term securitisations, STS requirements regarding simplicity of transactions are provided in Article 20, and, inter alia, include the requirement for the title transfer to be true sale, assignment or transfer with the same legal effect, determine that the transfer of title cannot be subject to severe clawback114 provisions in case of the seller’s insolvency, require that the
108 For example, Article 3 lays down conditions that need to be fulfilled to sell securitisations to retail clients; Article 5 imposes due diligence requirements that institutional investors.
109 ‘STS: Securitisations Made Simple.’ [2018] International Financial Law Review N.PAG <https://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=130119305&site=ehost-live&scope=site>, accessed 4 May 2020.
110 Article 6 requires originator, sponsor or original lender of a securitisation to retain an interest in the securitisation of not less than 5 %. Article 9 requires that the criteria for credit-granting to exposures to be securitised are equal to those applied to exposures that are not planned to be securitised.
111 Article 7 lays down requirements regarding information to be provided to competent authorities and potential investors.
112 Article 8 prohibits to use securitisation positions as the underlying exposure in the securitisation, unless to be used for legitimate purposes indicated in the article.
113 Vincenzo Bavoso, ‘High Quality Securitisation and EU Capital Markets Union-Is It Possible?’ [2017] Accounting, Economics and Law, 3.
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pool of the underlying exposures must be homogenous and the underlying exposures of the transaction cannot include securitisation positions (i.e. resecuritisations are not allowed). Requirements on transparency of the transactions are laid down in Article 22 and require to provide the potential investors with information before pricing. The information to be provided includes historical data on similar assets, covering at least five year long period. The goal of these requirements is to give investors sufficient information for them to be able to perform appropriate due diligence and make possible more appropriate calculation of the expected losses in different stress scenarios.115
Requirements relating to standardisation are provided in Article 21 and require to standardise the elements and characteristics of the transactions, with emphasises on applied rates and formulas, used transaction documents and servicer expertise116.
The requirements for ABCP STS securitisations are laid down in Articles 25 – 26 and in essence are similar to those applicable non-ABCP securitisations, but distinguished between ones applicable to transaction, programme level and sponsor. In addition to compliance with STS requirements, both ABCP and non-ABCP STS transactions must comply also with the previously discussed general requirements that SR imposes on all securitisations e.g. rules concerning disclosure.
The STS framework is important in context with the amendments to the CRR. The amendments to the CRR introduce a framework of assessment of capital requirements for securitisations in accordance with the framework provided in Basel III117 which requires subjects of the
regulation (i.e. institutional investors and banks regarding retained securitisaiton) to hold increased amount of regulatory capital against their securitisation positions, thus making securitisation costly and leaving it in a position of disadvantage if comparing to other funding methods118.
because the transaction was concluded within pre-determined period before insolvency. 115 Messina (n 4), 45.
116 ibid, 44.
117 ‘Basel III: International Regulatory Framework for Banks’ <https://www.bis.org/bcbs/basel3.htm>.
118 ‘STS: Securitisations Made Simple.’ [2018] International Financial Law Review N.PAG <https://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=130119305&site=ehost-live&scope=site>, accessed 4 May 2020.
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If securitisation is labelled as STS, it can be eligible for reduced regulatory capital requirements under CRR in comparison to those applicable to non-STS securitisations119. Therefore an incentive has been created to issue and invest in STS securitisations as lower capital requirements will apply.
The next subchapter will take a look at whether any of the components of the above discussed new framework has solved previously determined issues that were barriers for SME related securitisation.
4.2. SECURITISATION FRAMEWORK AS A TOOL FOR ADDRESSING
ISSUES RELATED TO SME FINANCING
This subchapter will analyse whether the newly introduced Framework has improved the situation for SME related securitisation – whether any of the issues determined in subchapter 3.3. have been solved.
4.2.1. AMENDMENTS TO REGULATORY CAPITAL REQUIREMENTS
As discussed above, the new Framework increased overall regulatory capital requirements applicable to securitisations as Basel III framework needed to be implemented. However, to tackle the issue of regulatory capital requirements not taking into account the actual risk level differences for different securitisations, the amendments to CRR provide two types of regulatory capital relief that could potentially be beneficial to SMEs: regulatory capital relief for securitisations that comply with STS framework and regulatory capital relief for securitisations that are not considered STS securitisations but comply with criteria set out in Article 270 CRR aimed at SME loan securitisations in specific. Thus, as general the regulatory capital requirements have been increased, to consider that prudential requirements have been eased for SME related securitisation, the respective securitisations need to either be able to comply either with STS framework or fall under Article 270 of CRR.
Firstly, we take a look at the regulatory capital relief for STS securitisations. The amendments to the CRR provide that the securitisations that qualify as STS securitisations can apply for preferential capital treatment under CRR – i.e. the amount of regulatory capital that must be held against investor’s securitisation position is lower comparing to regulatory capital
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requirement for non-STS securitisations. The provisions concerning regulatory relief are laid down in Articles 260, 262 and 264 of the CRR. While thesis will not provide detailed analysis of the calculations, in essence these articles include amended formulas for required regulatory capital calculation, resulting in capital requirements that are lower than for non-STS securitisations.
Thus in theory the new securitisation framework provides incentives for institutional investors to invest in securitisations that are labelled as STS securitisations. However, to determine whether these norms can be beneficial also in practice, we have to analyse how easy it is to label SME loan securitisations and ABCP programmes securitising SME trade receivables as STS securitisations, because receipt of this label is a precondition for preferential capital treatment. To be labelled as STS securitisation, Article 26 (1) of the SR requires all transactions within ABCP programme to be STS securitisations (although allowing 5% of the transactions in the programme to be temporary incompliant). This requirement creates hurdle and has made sponsoring banks doubt whether it is worth to create STS ABCP programmes as it is difficult to fulfil.120 This is reflected also in actual available from the list of securitisations notified to ESMA121 – significant proportion of the notified STS securitisations are ABCP transactions. However, not a single ABCP programme has been notified. As a result, investors of ABCP programmes are not entitled to obtaining regulatory capital relief that they could receive if ABCP programmes would be recognised as STS. Therefore, in practice the Framework seem to fail to improve the regulatory capital situation regarding investing in ABCP programmes. Issue that concerns SME loan securitisations was flagged already before adoption of the Framework – it is said that market participants mostly use synthetic securitisation to securitise SME loans122. The simplicity standards for STS securitisations provide that to be labelled as STS securitisation the securitisation must be a true sale transaction i.e. it cannot be synthetic. Thus the STS framework has created an obstacle for SME loan securitisations that are synthetic to obtain STS label and result in preferential capital treatment cannot be obtained for these
120 Clifford Chance, ‘Testing the New Foundations’ (2019) <https://www.cliffordchance.com/briefings/2019/06/testing_the_new_foundationsrecentdevelopment.html>, accessed 5 July 2020.
121 ‘STS Securitisation Notifications’
<https://www.esma.europa.eu/policy-activities/securitisation/simple-transparent-and-standardised-sts-securitisati on>, accessed 15 July 2020.
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securitisations.
EC has stated that it is ‘well aware that true sale securitisation is not the most cost-efficient tool to fund SME loans. It is precisely for this reason that a specific simple type of synthetic securitisation that is used by public development banks to fund SME loans has been granted an STS equivalent prudential treatment’123.
The equivalent prudential treatment is included in Article 270 of the CRR which provides that the originator can calculate the amounts of risk-weighted exposures in respect to senior124
securitisation positions using the same formulas that provide preferential capital treatment for STS securitisations, if (i) securitisation complies with requirements for STS securitisation provided in the SR, except Article 20 (1) to (6)125; (ii) the securitisation is backed by
exposures to companies at least 70 % of whcih qualify as SMEs within the meaning of Article 501126; (iii) the credit risk that is not retained by the originator is transferred by a guarantee or
a counter guarantee; (iv) the credit risk is transferred to a party which is the central government or bank of a Member State, a multilateral development bank, an international organisation or a promotional entity, provided that the exposures to the guarantor or counter-guarantor qualify for a 0 % risk weight under CRR; or an institutional investor127 if
the guarantee or counter guarantee is fully collateralised by cash on deposit with the originator.128
To summarise, Article 270 allows senior positions of SME loan securitisations that are not STS securitisations to receive equal regulatory capital treatment to treatment provided to STS securitisations i.e. the required amount of regulatory capital will be lower than for non-STS securitisations.
123 ibid, 10.
124 Definition of senior securitisation position is given in Article 242 (6): ‘position backed or secured by a first claim on the whole of the underlying exposures, disregarding for these purposes amounts due under interest rate or currency derivative contracts, fees or other similar payments, and irrespective of any difference in maturity with one or more other senior tranches with which that position shares losses on a pro-rata basis’.
125 Several simplicitly criteria related requirements, including the requirement for the transaction to be true sale transaction.
126 As mentioned in chapter 3, Article 501 of CRR recognises as SMEs companies that comply with definition laid down in Commission Recommendation 2003/361/EC in terms of turnover.
127 Defined in point (12) of Article 2 of the Securitisation Regulation.
128 Article 270 of Regulation (EU) 2017/2401 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms.
