The European securitisation market could play a vital role in corporate funding once economic fundamentals return to normal, but proposed regulatory changes pose a huge challenge, according to ratings agency, Standard & Poor’s.
S&P finds that the collapse in new securitisation issuance since the financial market meltdown stems mostly from the weak state of the banking system and the abundance of central bank support. Securitisation has been cited as one of the main causes, particularly in the US subprime sector.
The model is based on banks pooling together tranches of loans and packaging them as asset-backed securities, mostly in the form of mortgages. They are then sold to investors.
The problem in the US is that subprime mortgages were lumped in with high-quality mortgages and the entire structure was given an AAA credit rating. When the subprime market collapsed, panic spread among investors holding ABS, which led to a massive sell off.
ECB president Mario Draghi is looking at developing an ABS market for SME loans. Banks with SME loanbooks could securitise these loans and sell them to investors, which would free up their balance sheets to increase lending.
The Bank of England and the ECB’s recent joint paper concluded that proposed regulatory changes will weigh on the potential for the future securitisation market. Under new capital and liquidity requirements the cost of holding an ABS is much higher than other asset classes including covered bonds and whole loan portfolios.
While S&P agrees that regulatory changes will impact on the securitisation market, it argues that banks shrinking their balance sheets and the glut of money available through official wholesale channels is having a bigger effect.
S&P says securitisation could offer a lucrative funding source and could extend to non-bank lending.
“We note that policymakers’ recent comments on securitisation have varied in emphasis and ambition. Some seem focused on rebuilding the European securitisation market in its existing image, ie, as mostly a wholesale funding tool for bank originators,” said S&P.
“Others appear more ambitious, in our view, for example contemplating the use of securitisation to underpin a shift toward greater capital market, non-bank funding for European small and mid-size enterprises.”
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