European regulator U-turns on synthetic securitisations
Deals with use-it-or-lose-it mechanism can qualify for capital relief, EBA policy expert says
The European Banking Authority looks set to ditch a proposal that would have prevented banks using a popular form of credit enhancement in synthetic securitisations from qualifying for capital relief on the underlying assets.
The issue concerns excess spread – the surplus difference between the yield on the securitised assets and the interest paid to investors. This is used to cover the expected first losses in synthetic securitisations. Banks with high-risk loan portfolios often insert it into
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