The European Banking Authority will allow RMBS to be counted in the Liquidity Coverage Ratio as "high quality liquid assets".
The RMBS must be rated at least AA-’ by Fitch Ratings and Standard & Poor’s, and Aa3’ by Moody’s Investors Service.
The minimum issue size of the structure is 100 million (or the local currency equivalent) and the deal must be structured with a maximum time to maturity of five years. This means that new senior bonds will have an expected maturity of less than five years if they are to be considered HQLA.
Additionally all assets backing an RMBS must be first-lien residential mortgages and only senior tranches can be included.
Analysts at Barclays said in a report that the updated recommendations remove the loan to value restriction of 80% for RMBS, the EBA had originally proposed back in Jan. This change will now allow Dutch RMBS to be included in the LCR.
“We are surprised, given the continuing regulatory backing and comments to try and align the LCR with central bank eligibility criteria that SME ABS was not included,” said Barclays. “This may well still be a possibility, but is looking less likely.”
The LCR is being set up to help provide “short-term resilience of a bank’s liquidity risk profile by ensuring that it has sufficient high-quality liquid assets to survive a significant stress scenario lasting for one month.”