THE European Central Bank (ECB) is planning to make it easier for banks to use a popular type of credit insurance in a move that could ultimately allow them to make more loans.
The watchdog and the European Banking Authority (EBA) are working on a proposal to simplify reporting requirements for lenders seeking approval for so-called significant risk transfers (SRTs), according to sources familiar with the matter who requested anonymity to discuss the internal plans.
The two institutions intend to present that plan to the European Commission later this year, they said. Work on the proposal involves officials from the European Banking Federation (EBF), a lobby that represents major banks and some of the most prolific originators of SRTs, according to two of the sources.
The measures would be part of a larger effort by the European Union to clear hurdles for banks to offload risk and free up lending capacity as the bloc faces massive investment needs for defence spending and the transition to a greener economy. The EU recently intensified the effort and could publish proposals for a public consultation as soon as October, Bloomberg has reported.
“We confirm that we support having a clearer rule for SRTs,” an EBA spokesperson said. “As a consequence, we also support that any Commission work on securitisation should include this.”
Representatives for the ECB and EBF declined to comment.
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SRTs are designed to free up regulatory capital by transferring credit default risks to investors. Several of Europe’s largest banks including Deutsche Bank, Nordea Bank and Banco Santander have already been using the transfers.
SRTs allow banks to insure loans by bundling their credit risk into a portfolio, slicing it into several tranches with varying default probabilities, and selling a coupon-paying note on the tranche – typically the one with the highest default risk – to investors.
The process, known as synthetic securitisation, substantially reduces the likelihood that the bank will sustain losses on the remaining part of the portfolio. That in turn decreases the amount of capital they are required to hold as a safety cushion.
Banks can use the unlocked equity for other purposes such as fresh lending or shareholder payouts. Investors, who typically do not need to meet capital requirements for loans, are drawn by attractive yields in return for the risk they take on. BLOOMBERG
