Regulations & Current Topics

Several regulations affect the economic efficiency and structuring of CRS transactions. In this nascent market, the applicable regulation is continuously developing. Here we highlight the most important regulations, both current and developing, how these impact CRS, and our views on these.

Regulation has a profound impact on CRS. As a relatively young asset class, CRS is still in development and regulation continues to shape the market both directly and indirectly. There is a great variety of regulations that affect the economic efficiency and structuring of CRS, with significant differences across jurisdictions. This is due to the nature of CRS: a type of securitisation, which allows banks to achieve capital relief on a portfolio of credit exposures. As such, it has multiple touchpoints with regulation.

Firstly, the European Securitisation Regulation governs CRS directly, as a type of securitisation also known as ‘on-balance sheet securitisation’. For example, the regulation 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 enables transactions that meet additional STS criteria to benefit from lower capital requirements. Since April 2021, CRS transactions are also eligible to become “STS”. We strongly support this development, as we have been advocating for the inclusion of CRS in the STS framework since 2015, and elaborate on this below.

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, 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 III and its finalisation, also known as ‘Basel IV’, 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.

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.


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, the framework for ‘Simple, Transparent and Standardised’ (“STS”) securitisations, became applicable to on-balance sheet securitisation, which is the technical legal term for CRS. This new framework was introduced under the EU’s Capital Markets Recovery Package (“CMRP”) 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 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 STS 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 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 synthetic 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 Q2 2022, we have closed five CRS transactions which obtained the STS label, covering underlying loan portfolios of € 27.6 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”.

Current topics – the impact of the Basel aggregate output floor

Although already published in December 2017, the final package of Basel III reforms, has not yet been fully implemented. There are several aspects of these reforms that affect how bank capital is calculated and therefore Basel III also affects credit risk sharing. The reform that is likely to have the largest impact on CRS is the aggregate output floor.

The output floor was introduced by the Basel Committee for Banking Supervision (“BCBS”) as a response to concerns that the differences in RWAs between banks were larger than justified. BCBS has therefore set a floor for the required banks’ capital calculated under the Internal Model Based Approach (“IRBA”). This output floor when fully phased in, will equal 72.5% of the capital required based on the Standardised Approach (“SA”), for the aggregate of all Pillar 1 capital. By doing so, the BCBS has limited the benefit of using internal models.

This impacts CRS through the calculation of the risk weight for the retained senior tranche(s), which affects the capital relief that can be obtained through credit risk sharing. The calculation and associated risk weights differ substantially between the internal models based approach (“SEC-IRBA”) and the standardised approach (“SEC-SA”), with the latter being significantly more conservative. As such, SEC-SA leads to a much higher risk weight of the retained tranche(s) and therefore considerably less capital relief. In addition, SEC-SA requires securitisation of wider first loss tranches in order to be effective, which increases the cost for capital relief as well. Neither the higher risk weight, nor the wider tranches are related to risk fundamentals, nor is the wider tranching necessary for achieving significant risk transfer. After all, it is the exact same securitisation as before with the exact same underlying assets.

This combined effect on the costs of capital relief can cause many CRS transactions to become uneconomic. Decision making for credit risk sharing is typically done on a marginal benefit basis, and when a bank is constrained by the aggregate output floor, that marginal benefit must be calculated using the less economic standardised approach. This is a problem for European banks in particular. And while the beneficial prudential treatment under the STS framework helps, it is limited due to the wider tranching required under SEC-SA. For this reason, further measures need to be taken to address the impact of the aggregate output floor for credit risk sharing as otherwise the positive momentum, with STS for CRS as a catalyst, and therewith increasing positive impact of the product on the financial markets and real economy might be short-lived.

Another, more indirect, effect of the output floor on CRS is that it lowers the benefit for banks to develop and maintain sophisticated internal models. We believe that sophisticated models, such as the internal models developed under IRBA, are crucial for understanding the credit risk of a credit portfolio. These models enable banks, and therewith investors in the credit risk originated by banks, to have the best grasp of credit risks in the portfolio. Developing and maintaining sophisticated internal models requires a significant investment by the banks. By limiting the capital benefit of these models, it becomes harder for banks to justify the cost of continued model development and maintenance to shareholders. This may have an overall negative impact on the risk management practices at a bank, but also on the ability of issuing CRS transactions.