The Association of Financial Markets in Europe (AFME) has responded to the European Commission’s landmark securitization report that was released in June 2025 (see: Revival begins – 20/06/2025 | RTRA Intelligence Ltd). AFME members broadly welcomed changes to the SRT framework but highlighted the PBA SRT tests as a challenge which has been acknowledged for some time. The organization pointed to the incorporation of more realistic pre-payment assumptions to make them more workable for banks who wish to pass them.
Nevertheless, AFME confirms the workability of the PBA tests in the context of the ECB’s fast track process that is still being trialled. Indeed, more time is required to assess whether the assumptions in that case are appropriate in all cases rather than simply adopting them in full for the new SRT test. However, the latest report suggests growing acceptance of the PBA test from the industry under certain conditions.
According to the AFME report, the workability in practice of the new proposed quantitative test-based on the PBA test from the EBA SRT Report of 2020-will depend on how banks are required to go about allocating the unexpected losses to the tranches.
AFME notes: ‘’It is important that banks are able to make this allocation in a way which actually reflects the expected performance of the securitised portfolio taking into account appropriate stressed conditions, currently not reflected in Recommendation 10 of the EBA SRT Report, where, for example, in the back-loaded scenario, two-thirds of the unexpected losses were to be assumed to occur in the last year of the securitisation which is not realistic.’’
Hence, the organization notes that it should be clarified in the EBA mandate in proposed Article 244(7)(a) that these calculations should reflect the originator’s historical experience, and that it should be permitted to take appropriate pre-payment assumptions into account for that purpose.
Nevertheless, AFME members state that the assumptions underpinning the PBA Test in the ongoing ECB trial for a fast track SRT assessment process appear to be workable.
Yet more time is required to assess whether those assumptions are appropriate in all cases rather than simply adopting them in full for the new SRT test.
According to the EBA SRT Report – and as proposed for adoption within the fast track process by the ECB – the CRT test is considered passed if the risk transferred, which consists of lifetime expected (LTEL) and unexpected losses (UL), is larger or equal to the capital relief.
The CRT test must be passed in both an evenly loaded scenario where the EL for the outstanding portfolio is calculated on a quarterly basis and a backloaded scenario, which stipulates that 2/3 of the LTEL calculated from the evenly loaded scenario would occur in the last 1/3 of the life of the trade. The UL hits the SRT in the last four quarters of its life both in the evenly as well as the backloaded scenario.
As reported already by RTRA Intelligence (see: SRT tests disclosed – 20/03/2025 | RTRA Intelligence Ltd), the back-loaded loss allocation assumptions remain conservative in the ECB’s proposed fast track approach.
However, the UL is now helpfully-from the industry’s perspective-a constant percentage applied to the evolving portfolio. This means that the UL is likely to be smaller in the backloaded scenario and time calls are treated as reducing maturity, with no reference to a requirement for the call to reduce maturity for maturity mismatch purposes. Still, there seems to be some ambiguity around the treatment of pre-payments.
