Reform of the EU Securitisation Framework—Part 10: Changes to the Liquidity Coverage Ratio (LCR) Regulation

Background

Post-Crisis Regulatory Landscape

Following the global financial crisis, securitisation markets were subject to stricter regulation due to their perceived role in amplifying systemic risk. The EU's original LCR regulation, introduced as part of the Capital Requirements Regulation ("CRR"), imposed conservative eligibility criteria for assets to qualify as High-Quality Liquid Assets ("HQLAs"). Securitisations were largely excluded from HQLA status, reflecting concerns about their complexity, opacity and performance during periods of market stress.

Market Impact

The restrictive LCR treatment contributed to a significant contraction in the European securitisation market. Issuance volumes remained subdued, and the market's role in funding the real economy—particularly for mortgages, SMEs and consumer credit—was diminished. This contrasted with other jurisdictions, such as the United States, where securitisation continued to play a more prominent role.

Development of the STS Securitisation Framework

In response, the EU introduced the "simple, transparent and standardised" ("STS") securitisation framework in 2019, aiming to restore confidence by promoting high-quality, well-understood securitisations. However, the LCR regulation did not fully recognise the improved risk profile of STS securitisations, maintaining their exclusion from HQLA status.

Calls for Reform

Industry participants, policymakers and the European Central Bank have consistently advocated for a more risk-sensitive approach to securitisation in the LCR, arguing that high-quality securitisations can provide reliable liquidity and support financial stability. The lack of alignment with Basel III standards, which permit certain securitisations as HQLAs, was also seen as a competitive disadvantage for EU banks.

Key Proposed Changes for Securitisations

• Recalibration of LCR Treatment for Securitisations. The European Commission proposes to expand HQLA eligibility to include senior tranches of STS traditional securitisations with credit quality steps CQS5 to CQS7 (equivalent to a rating from A+ to A- from S&P, or its equivalent from other rating agencies). These exposures would remain subject to all other eligibility conditions for inclusion in credit institutions' liquidity buffers, but would carry a haircut of 50%. As a result, in addition to the current eligibility of CQS1 to CQS4 senior STS tranches, CQS5 to CQS7 senior STS tranches would also qualify as a Level 2B HQLA—albeit with a higher haircut.
• Eligibility Criteria—Convergence With the EU Securitisation Regulation. The current framework provides for duplicative homogeneity and other eligibility criteria as between the EU Securitisation Regulation (applicable to a securitisation's underlying exposures, to determine eligibility for STS status) and the existing LCR delegated regulation (applicable to senior tranches of STS traditional securitisations, to determine eligibility for HQLA status). To provide for a more unified approach, the Commission proposes to apply the EU Securitisation's homogeneity criteria for both purposes, rather than maintaining a separate set of criteria for LCR purposes.
• Removal of Requirement of Maximum Weighted Average Life ("WAL"). In line with the effort to channel more long-term financing to companies and infrastructure projects, the Commission proposes to remove the EU-specific requirement that, to be eligible for the liquidity buffer, a securitisation must have a remaining WAL of five years or less. Under the current regime, the WAL requirement limits the eligibility of securitisations with a long-term initial maturity—such as residential mortgage-backed securities—due to the nature of their underlying assets, even though it has no equivalent in the Basel standard. 
• Haircut and Cap Adjustments. The proposals set a 25% (instead of currently 35%) haircut for eligible STS securitisations, thereby aligning with the treatment of covered bonds and corporate debt securities in Level 2B. The overall cap for Level 2B assets in a bank's liquidity buffer remains at 15%, with a sub-cap for securitisations. By lowering haircuts and allowing for inclusion in liquidity buffers, the proposals remove a major regulatory barrier that previously discouraged banks from holding securitisations—even high-quality ones. Furthermore, resilient securitisations should even benefit from a 15% haircut, provided that the issue size of the tranche meets a minimum amount (proposed to be EUR 250 million (or equivalent) for securitisations with a long-term credit rating of between CQS1 and CQS4).
• Monitoring of Liquidity of Securitisations. The Commission proposes to mandate the European Banking Authority to regularly monitor the liquidity of securitisations, in particular the senior tranches of STS traditional securitisations, and to report its findings to the Commission, the European Parliament and the Council.

Potential Market Impact

• Market Revitalisation. By aligning the LCR treatment of securitisations more closely with covered bonds and corporate debt, the proposals aim at stimulating the European securitisation market, which has lagged behind other jurisdictions due to regulatory constraints.
• Risk Sensitivity. The eligibility criteria and haircuts are designed to ensure only high-quality, transparent securitisations benefit, maintaining prudential standards while supporting market development.
• Market Development. The proposals may incentivise more issuance of STS-compliant securitisations, fostering growth in the European securitisation market and supporting funding for the real economy, particularly in the mortgage and auto loan sectors.
• Alignment With International Standards. The changes bring the EU closer to Basel III standards, which already allow certain securitisations as HQLAs, addressing previous concerns about the EU's more restrictive approach.

Market Feedback

• Positive Reception. Market participants, including industry associations and issuers, have broadly welcomed the proposals as a long-awaited step toward a more balanced regulatory treatment of securitisations. They highlight the potential for increased investor demand and improved market functioning.
• Calls for Further Expansion. Some stakeholders argue that the eligibility criteria remain too restrictive, excluding other asset classes and non-STS securitisations that may also exhibit strong credit performance and transparency. There are calls for a broader recognition of high-quality securitisations beyond the current scope.
• Implementation Concerns. Banks and investors seek clarity on operational requirements and the process for verifying STS status, as well as the interaction with other prudential regulations.

Conclusion

The EU Commission's 17 June 2025 proposals mark a significant step in recalibrating the LCR framework for securitisations, with the potential to enhance market liquidity and support the real economy. While the changes have been positively received, market participants advocate for further refinements to ensure a robust and inclusive securitisation market in Europe.

Looking Ahead

The Commission's proposed amendments have been submitted to the European Parliament and the Council of the EU for review and approval. Changes to the current draft amendments should be expected as part of the legislative negotiation process, though it is unclear at the present stage how extensive such changes may be. There is no defined timeline for the process, though it is expected to be at least 18-24 months before the proposals would become law. The proposed amendments also give rise to certain practical issues, which might challenge the success of the legislative proposals. 

Further, it is unclear whether the United Kingdom will seek to minimise regulatory divergence by adopting similar changes to its "on-shored" version of the EU regime. Market participants are advised to conduct a thorough legal analysis of the evolving regulatory landscape, including the interplay between EU and UK regimes, to ensure compliance and to capitalise on new investment opportunities that may arise from a harmonised or divergent approach.