Sovereign Bond-Backed Securities (SBBS):  A European tool to help reduce risk in the banking union

Article

Sovereign Bond-Backed Securities (SBBS): A European tool to support portfolio diversification in the Banking Union

24 May 2019

Regulatory News Alert

Context and objectives

In April 2019, the European Parliament endorsed an agreement on the regulation for Sovereign Bond-Backed Securities (SBBSR). The new financial instrument would take the form of low-risk liquid assets backed by a pre-defined pool of Euro-area central government bonds.

SBBS are a market-led solution to promote financial integration, reduce the 'home bias' in investors' portfolios and facilitate the diversification of sovereign exposures. In terms of financial sector stability, SBBS should contribute to further weakening the link between banks and their governments by allowing banks to invest in a type of low-risk liquid asset that is less dependent on the solvency of one particular nation state while still benefiting from a more favorable regulatory treatment than traditional securitization products. More specifically, SBBS will enjoy the same regulatory treatment as national Euro-area sovereign bonds (e.g. in terms of capital requirements, the eligibility for liquidity coverage and collateral, etc.).

At the same time, the regulation defines SBBS in a way so that only private investors share risks and possible losses – a mutualization of those among Euro-area Member States is explicitly avoided.
 

SBBS label and composition rules

A financial instrument can be classified as a SBBS if it fulfils the following requirements:

  • Denomination in Euro 
  • Credit risk associated with the exposures to an underlying portfolio of Euro-area sovereign bonds
  • Complies with SBBSR 

An SBBS issue shall be composed of one senior tranche of sovereign bonds, whose outstanding nominal value accounts for at least 70 percent of the total nominal value of the SBBS, and of one or more subordinated tranches. Thereby, the nominal value of a junior tranche should amount to at least 5 percent of the total nominal value of the SBBS.
 

Where we stand today

The proposal will now be discussed by the Council before it will be published in the Official Journal of the EU. The SBBSR will enter into force on the twentieth day following that of its publication.
 

How can Deloitte help?

In this rapidly evolving crossroads between regulations, Deloitte can help you stay ahead of the game with our Kaleidoscope Regulatory Watch services, which monitors and analyzes upcoming changes.

In light of the future evolution of the regulatory framework and market trends such as the development of new financial instruments, Deloitte’s advisory specialists and dedicated services can also help you design and implement your renewed business strategy.

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Contacts

Pascal Martino
Partner – Banking & Digital
Leader
Tel : +352 45145 2119
pamartino@deloitte.lu

Simon Ramos
Partner – IM Advisory & Consulting 
Leader
Tel : +352 45145 2702
siramos@deloitte.lu

Jean Philippe Peters
Partner – Risk Advisory
Tel : +352 45145 2276
jppeters@deloitte.lu

Arnaud Duchesne
Director – Risk Advisory
Tel : +352 45145 4852
aduchesne@deloitte.lu

Benoit Sauvage
Senior Manager – RegWatch,
Strategy & Consulting
Tel : +352 45145 4220
bsauvage@deloitte.lu

Marijana Vuksic
Manager – Strategy & Regulatory Compliance
Tel : +352 45145 2311
mvuksic@deloitte.lu

 

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