The securitisation markets could be one of the most effective ways of developing non-bank funding and introducing much needed liquidity into the economy, particularly for the SME sector.
The Government is using the EU presidency to push a number of non-bank funding models throughout the eurozone
The Department of Finance is currently working on proposals on how to develop a securitisation model that would benefit SMEs in this country. Department officials have held a series of meetings with officials from other state agencies as well as academics and the private sector to develop proposals.
The model works by pooling assets together into an investment vehicle. These assets would then be given a credit rating and sold to investors.
The main focus of the Department of Finance is to keep any contingent liabilities that arise through securitisation completely disconnected from the State.
Sources familiar with the situation say that an Irish securitisation market could only work as part of the broader European market. Moreover, there would have to be a single EU entity such as the European Investment Bank (EIB) acting as a backstop for the industry.
However, the European securitisation market is broken. For the market to function efficiently, banks will have to act as intermediaries. But banks are reluctant to hold securitised investment vehicles on their balance sheets because the new EU directive on capital requirement for banks — CDR IV — still hasn’t decided how much capital banks would have to set aside because of their exposure to these investments.
Liquidity in the Irish economy remains constrained because the banks are struggling to return to profitability and are still in the process of deleveraging. Moreover, the Irish banks will have to go through a series of rigorous stress tests later this year, which acts as another disincentive to lend in case it creates a capital shortfall.
However, a securitisation market is unlikely to benefit all Irish SMEs. Investors would look to SMEs that have exposure to high-growth markets and sectors.
The Government used the meeting of EU economics and finance ministers in Dublin last month to develop policies on non-bank funding.
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