FSB Findings: G20 financial regulatory reforms enhance securitisation markets

Basel - The Financial Stability Board (FSB) today published the final report of its Evaluation of the Effects of the G20 Financial Regulatory Reforms on Securitisation. The report focuses on the International Organization of Securities Commissions (IOSCO) minimum retention recommendations and the Basel Committee on Banking Supervision (BCBS) revisions to prudential requirements for bank securitisation-related exposures in RMBS and CLO markets.

The evaluation finds that these reforms, introduced in the aftermath of the 2008 global financial crisis (GFC), have contributed to the resilience of the securitisation market without strong evidence of material negative side-effects on financing to the economy. Complex structures that contributed to the GFC – including securitisations of subprime assets, collateralised debt obligations and re-securitisations – have declined significantly, while the securitisation market is more transparent. However, the market has not yet been tested through a full credit cycle to fully confirm the evidence on enhanced resilience. This is particularly relevant for CLOs that have grown significantly in recent years but have not yet experienced a prolonged downturn.

The reforms appear to have contributed to a redistribution of risk from banks to the non-bank financial intermediation (NBFI) sector, with banks shifting towards higher-rated tranches. This redistribution of risk has been driven both by an increase in non-bank financing of the economy and by the growth of non-bank investors in securitisations. Risk transfer for investors is more evident in the CLO than the RMBS market. The financial stability impact of this trend is difficult to assess since it is not always clear if the non-bank entities taking on the risks are well-placed to assume them given their funding structure and ability to withstand losses in stress events.

The report highlights key issues for national authorities and international bodies to consider:

• the need to monitor risks in securitisation markets in light of developments such as the growth of synthetic risk transfers and private credit in securitisation structures;
• the effectiveness of risk retention requirements for risk alignment in CLOs, given the fact that a large part of the global CLO market does not currently operate under such requirements and given the use of third-party risk financing for CLO structures; and
• differences in reform implementation across FSB member jurisdictions, whose impact needs to be considered as authorities explore opportunities for framework adjustments.

Benjamin Weigert, Director General for Financial Stability at the Deutsche Bundesbank and Chair of the FSB group that carried out the evaluation, said "The evaluation highlights the importance of the G20 reforms in enhancing securitisation market resilience. Nonetheless, recent market developments reinforce the need for authorities to monitor risks and to ensure the alignment of incentives between securitisation originators, sponsors and investors."

Ryozo Himino, Deputy Governor at the Bank of Japan and Chair of the Standing Committee on Standards Implementation that oversaw the preparation of the report, said  "Evaluations are a core part of the FSB's mandate, as they help us to assess whether agreed reforms are achieving their intended outcomes and identify any material unintended consequences that may have to be addressed. This was the FSB's first streamlined evaluation, focusing on the most relevant securitisation reforms and market segments from a financial stability perspective."