Q&A with Olaf Seijpen, Dutch Central Bank (DNB)

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Olaf Seijpen gave an overview of the Dutch Securitisation Market at the Securitisation event. This Q&A deals with all the questions he wasn’t able to answer during the conference.

Q: Is there not too much regulation around securitization compared to other instruments to make it attractive again for investors?

A: While I agree that securitization is strongly regulated, I do think that this is for a good reason. Whether we like it or not, securitization has played a significant role in the outbreak of the most recent crisis, although European securitization has experienced few losses compared to the US (see figure 3 below). Furthermore, most of the recent regulation concerns STS securitization which is meant to make things easier for investors.Default rates at AAA level - IIR

Q: Can there be securitisation regulation before discussions have been concluded on third-country equivalence (i.e. Brexit)?

A: For the market it is important that the regulations are completed soon, so we cannot wait for the end of the Brexit negotiations. However, I think it is very well possible to include considerations on third-country equivalence for securitiation in the regulation without waiting for the final outcome of the negotiations.

Q: Would you expect new Basel capital floors to overrule the capital requirements of STS? Or do you prefer STS to have a distinct treatment?

A: In case the outcome of the current Basel negotiations would include an aggregate capital floor, this does not have a direct effect on the capital requirements for STS securitizations. However, there could be an effect on the total capital requirements for banks that hold securitisations.  An aggregate output floor would minimize aggregate capital requirements for IRB banks to a certain percentage of the aggregate capital requirements that result from the SA. In case the Basel outcome would include granular output floors, there could be a direct effect on the capital requirements for STS securitisations.

Q: What is your view on the 100% LTV cap proposed in the STS proposals? When this rule will be enacted a lot of Dutch (legacy) mortgage loans are not eligible.

A: The current proposal indeed includes a LTV cap of 100% for exposures at the time of inclusion in the securitization. This indeed means that part of the Dutch legacy mortgage portfolio is not eligible for the STS label. However lending standards in the Netherlands are becoming stricter and from 2018 onwards it is not possible to get a mortgage with an LTV higher than 100%. This means that new mortgages will be eligible collateral for STS securitizations. In general, DNB is in favour of a further reduction of the maximum LTV of Dutch mortgage loans in the future as high personal indebtedness can be a further drag on economic growth in a downturn market, however this entails a clear political choice.

Q: STS aims to increase transparency for securitisations whereas these requirements do not exist yet for products like Covered Bonds. What is your view on this?

A: Transparency is important, for both investors and regulators, as it enables them to assess the risks involved in a transaction. Although the current regulatory requirements for covered bonds are indeed less strict regarding transparency, we do see several strong market-led transparency initiatives there, such as the Harmonised Transparency Template by the European Covered Bond Council. I think this shows that market participants find transparency more and more important. Nevertheless, I think it would be good if stricter regulatory requirements regarding transparency would apply to covered bonds as well.

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