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Article 20(11)(b)
In our view, the guidance does not adequately explain precisely when an adverse credit history should be
deemed to exist. This point is particularly important in countries which do not have a public credit registry
listing only all debtors with a negative credit history. These countries normally have instead a non-public
register containing both negative and positive information about clients. It will be especially problematic if
the register does not specifically flag customers with a negative credit status. It is true that para 48 of the
draft guidelines gives an example of a situation which should not qualify as an adverse credit history. But
there are a great many other situations where it is questionable whether an adverse credit history should
be considered to exist. How, for instance, should banks regard an order to pay which was issued one year
before a loan is granted if there is no indication at the time of granting the loan that any payments are
past due? If, in such a case, the credit registry does not explicitly flag the borrower as having a negative
credit history, no decision can be taken on the basis of the registry alone. Further information is needed
to enable IT-assisted processing and the exclusion of clients of this kind. This, in turn, requires such
information to be defined in more detail so that it can be evaluated by IT systems and it also requires the
information to be available. We would therefore ask the EBA to spell out in greater detail what cases the
term “adverse credit history” should cover.
Article 20(11)(c)
Para 50 of the draft guidelines does not help to clarify how this criterion is to be interpreted by saying:
“For the purpose of Article 20(11)(c) of Regulation (EU) 2017/2402, a credit assessment or credit score of
an underlying exposure should be considered to be significantly higher than for comparable exposures
held by the originator which are not securitised, when the credit score or assessment for such
underlying exposures is significantly higher than the average credit score or assessment of all
comparable exposures held by the originator which are not securitised.”
In our view, the above wording does nothing to explain precisely when a credit score should be
considered “significantly higher” than the average credit score of comparable exposures. Banks need hard
criteria on which programmable decisions can be based. This is the only way to ensure that their IT
systems are in a position to select exposures eligible for STS securitisations. The above guidance will not
be helpful in practice. Without certainty that they are interpreting the criterion correctly, and without the
ability to automate the decision-making process, banks will refrain from issuing STS securitisations,
especially given the harsh sanctions which the STS Regulation provides for.
The Regulation itself sets out the criterion as follows:
“(c) has a credit assessment or a credit score indicating that the risk of contractually agreed payments
not being made is significantly higher than for comparable exposures held by the originator which are not
securitised.”
We believe this requirement should be interpreted as meaning that the exposures to be securitised should
not have a significantly lower credit assessment or credit score than comparable non-securitised
exposures held by the bank. The credit quality of comparable non-securitised exposures should be
determined not by an average score, but by the range of acceptable creditworthiness which normally
forms part of a bank’s credit risk strategy. This means, in our view, that the bank can securitise as STS
securitisations all exposures whose credit quality does not significantly differ from those it takes on in the
course of its normal lending operations for a portfolio of a similar nature. Exposures in default or creditimpaired
within the meaning of the other criteria in Article 20(11) naturally have to be excluded.
The objective of the criterion, as we see it, is to prevent a bank from securitising exposures of a credit
quality which the bank’s own policies would no longer allow it to accept, with up-to-date knowledge of the
borrower’s creditworthiness, in the course of its normal lending operations for loans of a comparable
nature. We believe the intention is also to prevent the securitisation of exposures which are not yet in
default or credit-impaired within the meaning of the other criteria in Article 20(11) but whose credit
quality has deteriorated so significantly over time that the bank would no longer take them on in the
knowledge of the current credit status. Since the credit quality of exposures held by a bank may
deteriorate, it is our understanding that, in the event of a random selection, i.e. no conscious selection of
low-quality exposures, it should still be possible to securitise them as long as the credit quality and
probability of default do not significantly differ from the credit quality and probability of default which the
bank would still find acceptable for exposures of a comparable kind in the course of its normal lending
operations.
In our opinion, the term “comparable exposures” as used in Article 20(11)(c) clearly refers to the range
of credit quality acceptable in normal lending operations for exposures of a comparable nature. This
interpretation also has the merit of enabling practical implementation, which is a major prerequisite for
the subsequent STS securitisation of exposures.
We are opposed, by contrast, to an interpretation under which the credit score or credit assessment may
not differ significantly from the average credit score. This would mean that exposures taken on in the
course of normal lending operations and in compliance with a bank’s risk strategy could no longer be
securitised if their credit score or assessment differed significantly from the average. It is unclear,
moreover, when a divergence from the average should be deemed “significant”. This interpretation is not
compatible with, or covered by, the text of the regulation since the regulation makes reference not to
“average”, but to “comparable” exposures. As explained above, this means a range of credit quality will
be involved, not an imaginary single value arrived at by calculating an average.
The second subparagraph of Article 20(13) of the STS Regulation makes no reference to Regulation (EU)
575/2013 with respect to the requirements to be met by guarantors or sellers obligated to repurchase the
assets. The interpretation set out in the draft guidelines is therefore not covered by the STS Regulation.
The more logical and systematic interpretation, in our view, is to apply the non-impairment criteria of
Article 20(11) of the STS Regulation, not least in view of the objective of these criteria. When a person or
company undertakes to repurchase assets, the associated market risk becomes a credit risk. With this in
mind, there is no reason why the creditworthiness of the party making this undertaking should suddenly
be subject to different requirements. We would therefore ask the EBA to delete the reference to
Regulation (EU) 575/2013 and clarify that guarantors and sellers obligated to repurchase the assets
should neither be in default nor credit-impaired within the meaning of Article 20(11) of the STS
Regulation.
We believe that further major problems and questions of interpretation will only become apparent when
the first securitisations are carried out in practice. We therefore recommend that the EBA and ESMA make
a Q&A tool available so that interpretation issues encountered by the industry can be addressed and
clarified after the final guidelines are in place. Given the Commission’s wish to promote the European
securitisation market, queries should be processed and answered swiftly so as not to unnecessarily delay
issues of new securitisations.
We would also suggest that questions should be submitted centrally to one authority, e.g. the EBA, which
could then, where necessary, either respond in consultation with ESMA or forward certain questions to
ESMA.
Nicole Quade
00493016632103