“The positive sentiment has been around for a little while but it’s not always filtering down enough into the text of regulations", said Richard Hopkin, head of securitisation at the Association for Financial Markets in Europe. “In particular we need some more steps recognising that not all securities carry the same amount of risk.”
One obstacle to growth is the high capital charges that ABS incur relative to other investments, a consequence of the asset being tarred by association with the financial crisis. Insurance companies, for example, have traditionally been big buyers of high quality ABS because their solid long-term cash flows are a good match for long-dated liabilities. But onerous capital charges compared with bonds are putting them off. “The capital charges on high-quality securitisations make them less attractive [for insurance companies] to invest in", says Richard Baddon, insurance partner at Deloitte. “But the rules are still quite fluid [and] if regulators are more pragmatic there is a lot of liquid cash that insurance companies could deploy in the market.”
Another obstacle is the ECB itself. While the €1 trillion wall of three-year money delivered between 2011-12 helped stave off a regional financial crisis, critics say that it lessened the need for banks to sell securities to investors. Instead they could go to the ECB and get additional money, more cheaply. “It’s more expensive for banks to structure and place any securities in the market rather than repo it to ECB", says Olivier Renault, head of structuring at investment StormHarbour.
As a result, many banks purposely package ‘just for ECB’ securities in order to meet the bank’s collateral rules without any intention to market them. “Banks mint securities meeting the ECB’s requirements for collateral and that’s it – not in the hope that they will go sell them in the market", says Ian Bell, head of the Prime Collateralised Securities initiative, an industry body. In an environment of record low interest rates investor demand for ABS remains robust. The Portugal SME ABS was nearly two times subscribed. It followed a €363 million securitisation backed by Italian commercial mortgages marketed by Goldman Sachs last November.
Mr Draghi has called on regulators to distinguish between those desirable “plain vanilla” securities and others that are “highly structured [and] opaque”. Nevertheless, even yield-starved investors will go only so far. “It would have been hard to place a five-year [ABS] transaction – most [investors] are getting comfort from fact its short-dated", says Mr Renault. That points to a more fundamental problem. Regulators can change incentives but ABS issuance is unlikely to increase substantially until there is more economic growth and a greater inventory of loans to package up.
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