Regulations
Regulation has a profound impact on Credit Risk Sharing (“CRS”) and continues to shape the market both directly and indirectly. There is a great variety of legal rules that affect the economic efficiency and structuring of CRS, with significant differences across jurisdictions.
Here we highlight the key current and emerging regulations shaping CRS how these impact CRS and we share our perspective and advocacy priorities.
Firstly, the European Securitisation Regulation (“SECR”) governs CRS directly, as a type of securitisation also known as ‘on-balance-sheet (“OBS”) securitisation’. For example, the SECR includes minimum standards and requirements for the main parties involved in a securitisation transaction, such as the originating bank and the investor. It also created a framework for Simple, Transparent and Standardised (“STS”) securitisation which allows banks to avail additional capital relief for transactions that meet additional STS criteria. Since April 2021, CRS transactions are also eligible for the STS designation. We strongly support this development, as we have been advocating for the inclusion of CRS in the STS framework since 2015.
In the UK, following the enactment of the Financial Services and Markets Act and the publication of a Securitisation Regulations policy note and final draft statutory instrument (2024), the UK envisages for most provisions of the UK SECR to be replaced with the PRA and FCA rules. Both PRA and FCA rules seems to be broadly following the EU securitisation rules, with some targeted adjustments. The STS framework for CRS is, unfortunately, not yet included in the UK SECR.
In April 2021, under the EU’s Capital Markets Recovery Package (“CMRP”) the framework for STS securitisations, became applicable to CRS transactions, to make it easier for capital markets to support economic recovery from the COVID-19 pandemic.
To qualify for the STS designation, CRS transactions need to adhere to a variety of criteria, which fall under one of the three main pillars of the label. For ‘Simple’, this includes, among others, a homogeneity requirement for the underlying asset pool: only one type of exposure, for example corporate loans, is allowed. Under ‘Transparent’, the risk sharing bank has to provide data on historical default and loss performance and independent verification of the eligibility for (a sample of) the underlying exposures is required. An example of the requirements under ‘Standardised’ is a minimum risk retention by risk sharing bank (please find more information and our view on risk alignment here). Finally, several specific criteria for CRS transactions are included, such as which credit events should be included at a minimum.
The current STS standards allow for cash proceeds of STS compliant securitisations to be held on deposit by the risk sharing bank, albeit under conditions. We believe strongly that these cash proceeds should always be collateralised in order to mitigate bank counterparty credit risk. More details on collateralisation of investment notional can be found here.
The first year of STS for Credit Risk Sharing has shown that the framework adds positive momentum to the development of this market. Please see our blog “STS for Credit Risk Sharing is proving a success”.
Secondly, CRS is also a way of credit risk mitigation, thereby allowing banks to achieve capital relief. Capital relief is a key rationale for banks to enter into CRS. Banking regulation, such as the Capital Requirements Regulation (“CRR”), determines the extent to which a bank can gain capital relief and under which conditions. Within the European Union and the United Kingdom, capital relief is only granted if a bank achieves “Significant Risk Transfer” (“SRT”), in other words when a bank can show that the transaction indeed achieves credit risk mitigation to a significant extent.
In addition, banking regulations stipulate the capital requirements for the underlying credit exposures. The Basel Ill framework and its finalisation, in the USA also known as 'Basel IV' or 'Basel III Endgame', is the most recent comprehensive regulation affecting capital requirements for banks' credit exposures, as well as overall capital requirements for the bank. Banking regulation and supervision also govern whether banks are allowed to use internal models for determining capital requirements for its credit exposures, and whether these are appropriately calibrated. Sophisticated and well-calibrated internal models are hugely important for investors in CRS, as these typically allow for a more accurate estimation of potential losses that a given portfolio could experience during the life of the CRS transaction.
The Basel rules are not directly applicable and must be implemented through national or regional legislation. In the European Union, Basel III finalisation has been implemented via the Capital Requirements Regulation (CRR3), with further targeted amendments to the prudential treatment of securitisation which as of June 2026 are under legislative negotiation between the Council and the European Parliament following the Commission’s proposal amending Regulation (EU) No 575/2013 (https://finance.ec.europa.eu/publications/proposal-amending-capital-requirements-regulation-securitisation_en). In the United Kingdom, Basel III finalisation (referred to as Basel 3.1) has been formally adopted by the Prudential Regulation Authority through final policy statements, with application deferred until 1 January 2027 (PRA PS1/26; l-reforms"PRA PS19/25 on securitisation). In the United States, the original July 2023 Basel III “Endgame” proposal has been formally withdrawn and replaced by a re‑proposal issued on 19 March 2026 by the Federal Reserve, OCC and FDIC, which significantly recalibrates the framework toward greater risk sensitivity and reduced capital impact; the revised proposal remains subject to public consultation, with final rules — including those affecting securitisation capital requirements — not yet adopted. (https://www.federalregister.gov/documents/2026/03/19/regulatory-capital-category-i-and-ii-banking-organizations-and-banking-organizations-with-significant-trading-activity).
Finally, the structuring of a CRS transaction and the activities of banks are impacted by many other regulations, such as accounting and tax regulation. These generally have a far broader scope, however, they may have a noticeable impact on CRS transactions, nonetheless.
Firstly, the European Securitisation Regulation (“SECR”) governs CRS directly, as a type of securitisation also known as ‘on-balance-sheet (“OBS”) securitisation’. For example, the SECR includes minimum standards and requirements for the main parties involved in a securitisation transaction, such as the originating bank and the investor. It also created a framework for Simple, Transparent and Standardised (“STS”) securitisation which allows banks to avail additional capital relief for transactions that meet additional STS criteria. Since April 2021, CRS transactions are also eligible for the STS designation. We strongly support this development, as we have been advocating for the inclusion of CRS in the STS framework since 2015.
In the UK, following the enactment of the Financial Services and Markets Act and the publication of a Securitisation Regulations policy note and final draft statutory instrument (2024), the UK envisages for most provisions of the UK SECR to be replaced with the PRA and FCA rules. Both PRA and FCA rules seems to be broadly following the EU securitisation rules, with some targeted adjustments. The STS framework for CRS is, unfortunately, not yet included in the UK SECR.
Advocacy
As a pension fund asset manager, by our nature we have an investment horizon that stretches decades rather than years or months. Therefore, the long-term viability and sustainability of the CRS market is of the utmost importance to us. We strongly believe that this objective is only achievable if a balance is found between the long-term interests of banks, investors and the regulator.
Because of this conviction, we have since many years become a vocal advocate for harmonisation of practices, appropriate standards for healthy transactions and transparency. We do this through active dialogue with regulators, banks and investors, as any rule or standard will need to meet the objectives of all three. We further contribute to roundtables and consultations and publish our opinions where we believe this adds value.
We hope that by helping to shape standards in this young and promising market, we can continue to create sustainable partnerships in which risk is genuinely shared between the bank and investors.
STS Framework for CRS
In April 2021, under the EU’s Capital Markets Recovery Package (“CMRP”) the framework for STS securitisations, became applicable to CRS transactions, to make it easier for capital markets to support economic recovery from the COVID-19 pandemic. As an adamant supporter of healthy transaction structures, we strongly encouraged this development, and we are keen to continue contributing to improvement of the STS criteria for CRS transactions. We believe that key features of any healthy and sustainable investment class are that it is relatively easy to understand and manage, which is closely aligned with the objectives of STS. In our view, the CRS transactions that we have invested in prior to the implementation of the framework already broadly follow the spirit of STS.
To qualify for the STS designation, CRS transactions need to adhere to a variety of criteria, which fall under one of the three main pillars of the label. For ‘Simple’, this includes, among others, a homogeneity requirement for the underlying asset pool: only one type of exposure, for example corporate loans, is allowed. Under ‘Transparent’, the risk sharing bank has to provide data on historical default and loss performance and independent verification of the eligibility for (a sample of) the underlying exposures is required. An example of the requirements under ‘Standardised’ is a minimum risk retention by risk sharing bank (please find more information and our view on risk alignment here). Finally, several specific criteria for CRS transactions are included, such as which credit events should be included at a minimum.
The current STS standards allow for cash proceeds of STS compliant OBS securitisations to be held on deposit by the risk sharing bank, albeit under conditions. We believe strongly that these cash proceeds should always be collateralised in order to mitigate bank counterparty credit risk. More details on collateralisation of investment notional can be found here.
The first year of STS for Credit Risk Sharing has shown that the framework adds positive momentum to the development of this market. The framework has led established issuers to adapt their transactions to meet the STS criteria and has stimulated new issuers to enter the market. Up to Q4 2023, we have invested € 2.1billion in 13 STS-qualifying transactions, with a total underlying loan notional of € 39 billion with banks across the European continent. Indeed, virtually all CRS transactions we see being issued by EU banks since the implementation of the STS framework aim to achieve the STS certification. The first year of the STS framework for CRS has been promising and we expect this trend to continue. Please see our blog “STS for Credit Risk Sharing is proving a success”.
Questions?
For questions please contact Barend van Drooge.
