Clearstream hosted a forum on the regulatory change affecting financial services firms yesterday.
Among they keynote speakers was Yves Mersch, member of the executive board at the European Central Bank, who talked about the potential to replace traditional bank financing with securitizations, particularly for small and medium sized enterprises (SMEs). The ECB wants securitizations to make a comeback as part of an initiative to stimulate European economic growth via the capital markets.
“There is a need to restore coherence across the main sectors in particular amid unfavorable regulatory treatment of high quality securitization instruments without violating prudential principles,” said Mersch.
Mersch hinted that the ECB and the Bank of England would put forward a statement at the forthcoming IMF meeting urging more favorable regulatory treatment for securitizations. “I would not be surprised at the next IMF meeting if we heard such a statement. We have very good context on this issue, we are both looking in the same direction and our analyses are quite similar. And in high quality securitization we are also going in the same direction.”
Since Lehman’s collapse the underlying assets of securitizations were perceived as being of poor quality as they allowed originators to remove the riskiest loans for the end investor, said Mersch. Transparency has been brought to the ABS market thanks to the loan-by-loan reporting requirement in the eurosystem and elsewhere, said Mersch, thus helping to reduce risk.
“In addition to credit enhancements for senior European ABS, the eurosystem collateral eligibility criteria allow on publicly listed senior bonds with a minimum rating but also collateralization by a granular set of assets. Structural safeguards can go a long way to addressing the risk of ABS.”
However, he said, the ECB feels that EU ABS’s are being treated inappropriately by present regulations and the current proposals
“The securitization capital framework is currently being overhauled at the international level with proposals being calibrated largely on a single pool of data that does not reflect differences in standards across the world, the structural differences across ABS deals or the vastly different default performance of SME ABSs at the European and also at the global level,” said Mersch.
Mersch said he fears the resulting risk weights for securitization assets in the current discussions not only curtail growth in the Europe Middle East and Africa (EMEA) securitization markets but further damage the markets from its current state. “The revised securitization framework should reflect the risk mitigating features of high quality securitizations,” he said. “It is therefore very important that E.U. regulators move ahead swiftly in addressing these inconsistencies.
“It’s not my intention to look to a lowering of prudential standards in order to revise the recovery but only to have consistency in regulatory standards.”
Mersch said he favored putting securitization instruments into several categories and assigning preferential treatment only through instruments that meet the strictest requirements.
“From our own experiences within the eurosystem European collateral framework it is simpler to set up broad eligibility criteria and then conduct detailed analyses of those assets that pass through the gate,” he said. “In fact I would propose central bank eligibility criteria is a starting point for high quality ABS’s because they’re widely accepted by market participants and are free from conflicts of interest.
“Supervisory parameters can be adjusted in the current securitization proposals or there is always the option of adopting straightforward preferential risk weights in a manner analogous to covered bonds.
“The potential for SME ABS’s to provide some funding relief for SME’s is limited in part by current proposals to overhaul the securitization credit risk framework and is also limited by a level playing field, which are squarely within EU proposals. “
ECB Board Member Puts ABS Reform High on the Agenda at Clearstream Event
Keynote speaker Yves Mersch, member of the executive board at the European Central Bank, talked about the work being done in order to bring securitizations back onto the agenda as a means for financing SMEs.