The European Banking Authority (EBA) published today a report presenting the outcome of its assessment to the European Commission's call for advice on the European Secured Notes (ESNs). In addition, it puts forward recommendations on key aspects for the European Commission to consider when possibly designing the legislative framework forSME ESNs.
SME ESNs, similar to covered bonds, could be structured as a dual recourse instrument. Due to the high-risk profile of SME exposures, the EBA suggests a more restrictive framework, especially with respect to the coverage, the liquidity and the disclosure requirements and suggests strict eligibility criteria at both loan and pool level and a minimum level of over-collateralisation of at least 30%. In terms of capital requirement, it is advised that no preferential treatment (i.e. similar to covered bonds) is granted. However, a differentiated risk-weight treatment compared to unsecured notes could be considered subject to certain considerations.
The EBA does not recommend the creation of an infrastructure ESNs. A dual recourse structure for Infrastructure loans is not appropriate given the lack of granularity in a cover pool, the complexity of the loan structures and the specific and different nature of infrastructure projects making it very difficult to create a high quality dynamic cover pool of infrastructure loans.
The EBA recommends the European Commission to investigate the case for a new distinct asset class for high-quality project finance loans in the form of a standardised EU infrastructure bond. Further EBA work would be needed to specify the features and the applicable framework for this potential new product.
This contribution will provide input into the European Commission's considerations on the further development of the Capital Markets Union project.
The EBA has developed this opinion following a call for advice from the European Commission, which required the EBA (i) to assess whether a dual recourse instrument, similar to covered bonds, may provide a useful funding option to banks engaged in lending to SMEs and infrastructure projects and (ii) to determine an appropriate EU framework and regulatory treatment for this new product.