The outstanding amount of ABS in the EU is currently about EUR 1.5 trillion[1], which is around one quarter of the size of the US ABS market. Since its peak in 2009, the outstanding amount has decreased by a third, or EUR 750 billion. Residential Mortgage Backed Securities (RMBS) form by far the largest securitisation segment, accounting for 58%; SME ABSs are second, but account only for 8% of the market.[2] The largest jurisdictions in terms of outstanding ABS are the UK, Netherlands, Spain and Italy.
In 2006, all primary issuances were placed with end-investors and other banks; by 2009, almost all deals were retained by the originating banks and many were placed as collateral with central banks. [3] Despite some small improvements since, public issuance volumes remain very low in the EU and continue to be mostly originated in a small set of countries such as Germany, Netherlands and the UK. The deals that have emerged from the more stressed economies either involve short maturities, high yielding assets or SME transactions with specific support from the European Investment Bank or European Investment Fund, via purchases of senior or mezzanine tranches and/or via guarantees. Most European structured finance products performed well throughout the financial crisis, with low default rates. According to an analysis by Standard & Poor’s, the cumulative default rate on European structured finance assets from the beginning of the financial downturn, July 2007, until Q3 2013 has been 1.5%. [4] Some asset classes such as consumer finance ABS, SME Collateralised Loan Obligations (CLO) and RMBS have experienced default rates well below this average and the performance of European structured finance products has also been substantially better than US peers. By way of comparison, ABS on US loans experienced default rates of 18.4% over the same period, including subprime loans. [5]
It also appears that the new regulations to protect investors, as well as policy makers’ and authorities’ efforts to reduce the perceived regulatory stigma of ABS and to clarify their support for simple and more transparent securitisations have so far failed to kick-start the EU securitisation market. In large part, this may reflect current conditions, including the availability of cheap funding from other sources, deterring issuance of ABS, ongoing macroeconomic weakness in several European countries, aggravating investors’ concerns about future asset quality deterioration of the ABS collateral pools, and low demand for loans, making it difficult to build collateral pools providing sufficient income to support the coupons and credit protection investors demand. A sustainable recovery in stressed euro area jurisdictions will only be possible as credit risk gradually recedes on the back of structural reforms, strengthening economic fundamentals and unlocking profitable investment opportunities. Still, while these shorter-term factors decrease, there are a number of remaining structural roadblocks that may prevent investors and issuers from returning to the market. By addressing these issues now, the authorities can help to catalyse the return of asset backed securitisation to support monetary and financial stability and economic recovery.
Shambo Dey
Footnotes:
[1] Association for Financial Markets in Europe (AFME). End observation: 2013 Q4.
[2] Unlocking funding for European investment and growth, AFME.
[3] Association for Financial Markets in Europe (AFME). End observation: 2013 Q4.
[5] The corresponding default rates for European consumer finance ABS, RMBS and SME CLO are 0.04, 0.1 and 0.4% respectively.