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11 April 2014

BoE/ECB: The impaired EU securitisation market - causes, roadblocks and how to deal with them


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This joint paper, written for the G20/IMF spring meetings, states that the shrinking market is a concern because securitisation, if appropriately structured and regulated, can complement other long-term wholesale funding sources for the real economy. (Includes comment by AFME.)


Despite its long-term social value, securitisation today suffers from stigma, reflecting both its adverse reputation among investors and conservatism among regulators and standard-setters. This is the consequence of misaligned incentives in the years prior to the financial crisis, with many industry participants becoming entwined in a self-reinforcing dynamic between demand and supply of securitisations.

To address earlier flaws in the securitisation market, several financial regulations and other initiatives have already been implemented in the EU. These are focused on removing misalignments of interests and information asymmetries between issuers and investors, including creating greater transparency to support accurate pricing of credit risk. The new regulations include, amongst others, the following:

  • Risk Retention Rule (originators to maintain some "skin-in-the-game"), introduced in 2011;
  • measures that address information asymmetry with the securitisation process by increasing transparency of the securitisation structures (the due diligence requirement);
  • EU Credit Rating Agency Legislation in 2013, making rating agencies more transparent and accountable.

In 2013 the EIB and EIF launched a European-wide scheme to increase their involvement in securitisation. The "EIB Group ABS initiative for SMEs" provides credit enhancement for senior and mezzanine tranches of securitisations backed by SME loans, including guarantees, and facilitates their execution. Finally, there have also been pan-European and national initiatives from the private sector to enhance transparency and standardisation in securitisation markets.

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. These include: regulatory treatment, reliance on credit rating agencies, as well as transparency and harmonisation

Full paper


A FME welcomes central banks’ call for fair ABS rules

The paper says that concerted action, involving a range of policymakers and regulators, is needed to increase issuance of asset‐backed securities (ABS). AFME has long argued that securitisation has the potential to unlock the funding needed for Europe’s economic recovery. This joint paper outlines the practical steps needed to revive Europe’s securitisation market.

"Although policymakers at a senior level have been saying encouraging words about the economic benefits that Europe’s securitisation sector can bring, it is clear that time is running out for the positive regulatory signals needed on Liquidity Coverage Ratio and Solvency II. Europe risks sending mixed signals to the market", commented Simon Lewis, AFME’s Chief Executive.

Press release



© Bank of England


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