Capital Requirement Issues in the European Securitization Market: An Investigation of Capital Neutrality With Evidence From Two Public Securitizations and 10 European Banks’ Pillar 3 Disclosures

Abstract

This thesis presents five core principles for proper regulatory treatment of securitizations. In accordance with these, we present an extensive account of the issues with the current regulation of the European securitization market. Using Pillar 3 disclosures from 10 large European banks and two public securitization transactions, evidence of severe capital non-neutrality for retail and corporate securitizations is presented. Additionally, the thesis investigates the impact of the forthcoming SA Output Floor. The results indicate that the output floor will amplify capital non-neutrality and allocate excess capital asymmetrically among tranches, primarily to the detriment of senior investors. In consequence, senior tranches will likely become thinner.
Finally, we make two original recommendations that align with the aforementioned principles. The Modified SSFA scales the current Simplified Supervisory Formula Ap-proach of Basel III while the Unified Conservative Monotonic Approach is built from scratch around the principles. The former benefits from implementation simplicity, how-ever, it only resolves the issue of capital non-neutrality. The latter, in contrast, addresses all issues of the current regulatory treatment of securitizations but requires a compre-hensive overhaul of the entire regulatory framework.