Securitisation (Amendment) (EU Exit) Regulations 2019 — House of Lords, 2019-02-25
Topic: Domestic Commerce
Susan Kramer (Liberal Democrats, Centre to centre-left): My Lords, I will focus briefly on the second of the two statutory instruments. I need help from the Minister, because I am struggling to understand the consequences of this, and I am looking specifically at STS recognition. The Minister will understand that achieving classification as an STS is advantageous because it is very likely to lead to preferential capital treatment. That is very important to banking institutions, which obviously want to keep their capital requirements as low as possible. At the moment, to qualify for STS classification, all the parties to an STS securitisation have to be located within the EU. If I understand the change that flows from this statutory instrument, if we were to leave without a deal, the regime we would move into says that in the UK an STS can be recognised provided that just one of the relevant players is located in the EU—most likely the sponsor. I raise this issue because it sounds as though securitisations in the EU and in all third countries now become available for classification as an STS I raise that concern because we are all very aware that the United States has gone back to its old tricks in mortgage lending, and asset-backed paper, backed by US mortgages, is once more beginning to raise some fairly significant issues of concern. We have been protected from that to some degree by the STS regime, which requires that all relevant players are within the EU. If I understand this correctly, that protection is now removed, and since third countries can now get STS classification and therefore preferential capital treatment, we increase the risk or the attraction quite possibly—or rather, quite likely—to UK institutions to once again start playing in that environment of US mortgage-backed securities, where we already know there is incipient trouble; I hope it is genuinely incipient, but some people are using much stronger language than that. I would therefore like the Minister to explain that The other issue on which I had a question was under exposures to national promotional banks. At the moment, national promotional banks located in the EU, again, are eligible to be provided with preferential treatment. It would therefore encourage a financial institution to invest in those national promotional institutions because if it lends to them, it faces a lower capital requirement. What is the situation that will fall out of the picture, according to the Explanatory Memorandum? It seems to be KfW, which is the German state-owned development bank. A UK investor who is lending money to KfW would no longer get that preference as it calculated its required capital ratios To me, this is the equivalent of "have gun, shoot foot". KfW is a major player in funding small businesses in the UK. It has sat alongside the European Investment Fund and the European Investment Bank in putting significant blocs of long-term patient capital into large-scale infrastructure in the UK. I know that we have the British Investment Bank, but it is minuscule compared to the EIB, the EIF and KfW, and nothing I have heard from government suggests a scale-up to anywhere like the same dimensions. Why, then, would we, in a situation like this, try to discourage KfW from looking at opportunities to put its money into projects in the UK, and especially into that much-needed arena of small business? I find it slightly perverse but that is one of the things that this SI apparently intends to achieve. As I said, I am very fond of the British Investment Bank but, boy, does it have a long way to go before it can possibly replace those other institutions. Surely we should be encouraging KFW—we cannot do anything about the EIF or the EIB because of European rules—to keep it as a player.