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NPL Update – Recent changes to the EU Securitisation Regulation and CRR

AUTHORs: Turlough Galvin co-author(s): Vincent McConnon Services: Finance and Capital Markets DATE: 26/04/2021

In our recent publication “Securitisation Update – Recent Amendments and Guidance” we considered new amendments to the EU Securitisation Regulation and the Capital Requirements Regulation (“CRR”) which took effect on 9 April 2021. Several of these changes are relevant to participants in the European Non-Performing Loans market. We have summarised the key provisions below:

Key Definitions added to the EU Securitisation Regulation

non-performing exposure” or “NPE is defined as an asset which meets the requirements set out under Article 47a(3) of the CRR.

NPE Securitisation” means a securitisation backed by a pool of non-performing exposures the nominal value of which makes up not less than 90% of the entire pool’s nominal value at the time of origination and at any later time where assets are added to or removed from the underlying pool due to replenishment, restructuring or any other relevant reason.

Risk Retention

Article 6 Risk Retention for NPE Portfolios: As securitisation special purpose vehicles or “SSPEs” purchase Non-Performing Exposures (“NPEs”) at a discount to their nominal value and investor risk is benchmarked to the discounted value, the amendments to the EU Securitisation Regulation provide that risk retention shall be calculated by reference to the sale price of a portfolio of NPEs rather than to its nominal or outstanding value.

Investor Due Diligence

Article 5(1) Credit Granting Standards for NPE Portfolios: For NPE securitisations, confirmation that sound credit granting standards were adhered to at origination is somewhat irrelevant for an investor’s due diligence process as such exposures have since failed to perform as anticipated. The revised EU Securitisation Regulation therefore instead requires investors to verify that sound standards are applied with respect to the selection and pricing of exposures which comprise NPE portfolios.

Risk Weighting for NPEs

As discussed in our previous publication “European Commission Action Plan for NPLs” there is an expectation at EU level that the market for NPEs will increase as a result of the economic effects of the COVID-19 pandemic. In that publication, we identified one possible barrier to entrants into the buy side of the NPE market as being the manner in which risk weighting under CRR for NPEs is determined. The Amendments to the CRR acknowledge this by including new provisions which clarify how risk weighting with respect to a securitisation of NPEs should be calculated.

To discuss the recent amendments to the EU Securitisation Regulation and CRR or the European Commission Action Plan for NPLs in more detail please contact the members of the Finance and Capital Markets department at Matheson listed above.