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Graham Bishop is renowned for his vision and the courage to propose radical ideas, yet ground them in a mastery of the technical details of the financial system. He has been referred to as a one-man think tank.
European Commission: His influence at the meeting point of politics, economics and finance has been recognised on many occasions - most recently when the European Commission asked him to study the attitudes of investors toward the euro area sovereign bond markets. In particular, he explored attitudes towards the potential for a “common euro area safe asset”: what characteristics should it possess and whether it would ameliorate any of the concerns expressed about the features of existing bond markets.
Graham's many pro bono activities illuminate and reinforce his Consultancy Services. His deep knowledge of Europe’s financial system is integrated with his understanding of EU economic and budgetary policy-making – whilst set within the necessary framework of democratic accountability.
He was a member of the Commission's Consultative Group on the Impact of the Euro on Capital Markets; of the Commission's Strategy Group on Financial Services; and of the Committee of Independent Experts on the preparation of the changeover to the single currency (1994/5).
This Website, as well as Graham's Consultancy Service, is designed to bring clients the direct insights that flow from Graham’s position as a leading technical analyst of economic and structural developments in the financial markets of Europe.
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An EU framework based on such criteria would help to facilitate robust and well-functioning securitisation markets. It would also be closely aligned with the Commission’s priority to improve financing of the EU economy through Capital Markets Union.
This section of our response summarises our views on the following key aspects of the consultation: criteria; prudential treatment; risk retention; transparency; SMEs; and implementation. The responses in the sections following this executive summary address the questions posed in the consultation document.
Criteria
Significant progress has already been made at the international and EU levels to develop criteria that could be used to identify STS securitisation, including by the Commission itself. The BoE / ECB received helpful comments from a wide range of market participants and stakeholders on the joint BoE / ECB discussion paper published last year on a better functioning securitisation market. Respondents were broadly supportive of the concept of and principles for STS securitisation. Earlier this year, the Commission adopted delegated acts on the Liquidity Coverage Ratio and Solvency II. Those delegated acts differentiated the application of certain prudential requirements for credit institutions, investment firms and insurers based on criteria for STS securitisation. That was an important step forward. In the latter part of 2014, BCBS-IOSCO and the EBA consulted on more detailed criteria. Work continues to develop and enhance those criteria further.
The BCBS-IOSCO and EBA criteria provide a good basis for an EU framework for identifying STS securitisation. In developing such a framework, it will be important to incorporate enhancements made to those criteria in light of the responses to the recent BCBS-IOSCO and EBA consultations. This will help to ensure that a new EU securitisation framework is robust, effective and internationally consistent. Furthermore, consideration should be given to the appropriate treatment of Asset Backed Commercial Paper (ABCP) within such a framework.
Prudential treatment
Appropriate prudential recognition should be afforded to STS securitisations. That recognition should reflect the lower risk profile of such transactions relative to non-STS transactions. This year, the Basel Committee is considering how to incorporate criteria for STS securitisation in its revised securitisation framework. Including such a distinction for STS transactions in the context of the revised securitisation framework for credit institutions would address the shortcomings of the current framework and introduce greater risk sensitivity. The risk sensitivity of capital charges for STS securitisations should also be increased under Solvency II. That would help to reinforce the role of insurers as long-term providers of finance to the real economy.
Risk retention
Risk retention requirements play an essential role in aligning the interests of the Securitising Party (e.g. the original lenders / sponsors / originators) and investors. To ensure the integrity of the risk retention framework, loopholes, such as the one created by the current definition of “originator” used for credit institutions should be revised. Such loopholes allow scope for structures that meet the letter of the rules but fail to align incentives properly.
For STS securitisation, the “indirect approach” to due diligence on risk retention – which places the onus on the investor of verifying compliance with risk retention rules by the Securitising Party – should be complemented with a “direct approach” that imposes compliance directly on the issuers. That would allow investors, when completing due diligence on risk retention, to place reliance upon attestation provided by the Securitising Party. It would also help to ensure risk retention rules are implemented effectively and consistently across jurisdictions.
Transparency
Further steps could be taken to increase the transparency, consistency and availability of key data for investors in securitisations. The standardisation and ease of access to data were highlighted by investors responding to the BoE / ECB Discussion Paper as aspects where further improvements would be helpful. Additionally, securitisation-related reporting requirements offering materials and terminology could be standardised and made easier to use.
SMEs
One transparency issue in particular requires urgent attention and action: the need to improve the availability of Small and Medium Enterprises (SME) credit data in the EU. A major impediment affecting the securitisation of SME loans is the lack of investor confidence in the quality of underlying SME loans. Improving the availability of key performance metrics, while complying with national confidentiality laws, would significantly increase transparency and reduce concerns about the asymmetry of information between originators and investors.
Implementation and enforcement
A process of self-attestation of Securitising Party compliance with the STS criteria would be needed. Such a process should be augmented by appropriate supervisory oversight and an appropriate sanctioning mechanism where the criteria are not met.
Monitoring and consistency
We would urge the Commission to assess on a continuing basis the adequacy of measures introduced for STS securitisation, the consistency with relevant international standards and the relative treatment of similar financial instruments, in particular covered bonds which should also be subject to appropriate improvements in prudential standards. The consistency of legislation for, and implementation of, an EU framework for STS securitisation will be imperative for ensuring the sustainable revitalisation of the European securitisation market.
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