News on Securitisation: Possible rehabilitation measures for European SME securitisation

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Possible rehabilitation measures for European SME securitisation

Shambo Dey

1 March 2014

The main problem with the recovery of the Small and Medium Enterprises securitisation market in Europe has been the burdensome and inconsistent treatment of securitisation for regulatory capital and liquidity purposes.

But rehabilitation may be on the cards for the European securitisation market. The European Commission recently announced it could allow banks to use more securitisations in their liquidity buffers. The Commission's desire to revive Small and Medium Enterprises lending through securitisation seems to be very strong at the moment, unlike in December 2013 when the EBA reviewed liquid assets for the Commission and reported that some RMBS were liquid but put most securitisations in the lowest possible liquidity category.

The Commission is in the process of setting the standards for high quality assets in the LCR ratio and to ensure differentiation of "high" quality securitisation products. If included in the LCR, banks could be encouraged to buy RMBS and ABS, since they will then serve a regulatory, as well as economic purpose, and this could be crucial in reviving the market. To encourage investor involvement in the asset class, it was important to ensure that broader regulatory treatment was practical and consistent. Including a wider range of real-economy assets will also help securitisation to play its role in funding Europe's economic recovery.

Further, the ECB made public its willingness to start reviving plain vanilla securitisation, stating that it is critical that the regulatory treatment of asset-backed securities is based on real data and not the legacy of the US sub-prime disaster. Between mid-2007 and the first quarter of 2013 the default rate on ABS in the EU was only around 1.4%, whereas it was 17.4% in the United States. The ECB, the European Investment Bank and the Commission, have been exploring options that do not change the regulatory environment, but simply channel more funds to securitisation in the hope of boosting bank lending to Small and Medium Enterprises. The Commission published a paper called "Increasing lending to the economy: implementing the EIB capital increase and joint Commission-EIB initiatives" in June 2013, which explored earmarking EU structural funds to invest in ABS, using the European Investment Bank as the conduit for the funding. This would complement existing official support offered by the European Investment Fund, which guarantees securitisation tranches and offers credit enhancement to encourage Small and Medium Enterprise lending.

 

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