Over the term of a securitisation transaction, the concept of
non-compliance enables a securitising bank to classify a securitised
loan as materially non-compliant with transaction-specific,
contractually agreed requirements. Such a loan becomes unqualified for
loss allocation to the account of the protection sellers. Therefore,
non-compliant loans can directly affect transaction performance and the
extent of risk transfer that is actually achieved with the transaction.
The concept of non-compliance is incorporated in many securitisations
independent of the underlying assets or structure. In Germany, there are
currently no specific regulatory provisions in place regarding this
concept. However, a bank can use discretion when classifying a loan as
non-compliant and could thus report non-compliant loans strategically.
This hypothesis is tested based on a unique data set. The potential
regulatory effects associated with such conduct are elaborated.
Suggestions are made for a more adequate regulatory treatment of
non-compliant loans.