Securitisation touted as answer to ‘€4 trillion’ funding gap
Europe faces a €4trn funding gap in the coming five years as banks shrink their balance sheets and adjust to a raft of new capital and liquidity rules.
That is according to a report released by Prime Collateralised Securities (PCS) – an industry initiative that is designed to rehabilitate securitisation markets following the crisis. The report argues securitisation can help meet Europe’s financing shortfall.
Market participants caution that a revived securitisation market will not be enough on its own, but agree it could be part of the answer. “Securitisation in and of itself is not going to be the only solution to a €4 trillion funding gap – if that’s the number – but it can help close it by liquefying portfolios of assets that may otherwise have not been available, or liquid, to the capital markets,” says Jim Ahern, global head of securitisation at Société Générale Corporate & Investment Banking (SG CIB) in New York.
The €4trn figure is eye-catching – roughly equivalent to the total outstanding size of the US corporate bond market, says Michael Hampden-Turner, a credit strategist at Citi in London. The PCS reaches the number by considering the impact of shrinking bank balance sheets – which it says represents a decline of €2trn in financing – and the amount of assets that have to be locked away under Basel III’s new liquidity coverage ratio (LCR), which it puts at roughly €1trn. To that total, it adds a €1.9trin estimate from Standard & Poor’s of the financing volume that is required to ensure growth in Europe between 2012 and 2016.
The PCS report also highlights the European economy’s overwhelming reliance on bank funding. The ratio of securitised loans and corporate bonds to total financing volumes in Europe in 2011 was 19%, compared to 64% in the US, according to the report, which argues growth in Europe is too dependent on the health of the region’s banking sector.
“The current funding regime in Europe is already quite stretched. Europe needs to ensure funding is free and easy, and flowing to all parts of the economies of all countries – not just the large-cap corporates in Germany,” says Hampden-Turner at Citi.
The PCS report is timed to coincide with a green paper from the European Commission – expected in the coming days – which will address the long-term financing of the European economy.
Market participants hope the move will usher in changes to the current regulatory treatment of securitisation, widely seen as penalising the asset class. Market participants claim regulators have branded all securitised debt as dangerous, rather than isolating the structured credit products and behavioural abuses that were the trigger for the financial crisis.
As an example, the latest draft of Solvency II, which regulates capital requirements for insurers – traditionally significant buyers of securitised debt – continues to penalise asset-backed securities, requiring investors to hold far more capital than they would for a similarly rated covered bond, say market participants.
“If we don’t get the right sentiment around securitisation, then it’s going to be very difficult for us to get investors convinced that this product is part of the solution. If I’m trying to sell a AAA-rated asset-backed security to an insurance company, then it may not be willing to buy it purely because its regulator is telling it that it has to hold ten times the capital than if it had bought a similarly rated covered bond. It makes no sense. I’m not saying everything rated AAA is equal, but if it is a marker of comparable credit quality, then there shouldn’t necessarily be such a huge disparity in the capital treatment of the risk,” says SG CIB’s Ahern.
Recent months have seen some softening in the regulatory stance. The final version of the LCR, for example, allows residential mortgage-backed debt to be counted towards the buffer, as long as it is rated at least AA and makes up no more than 15% of the total stock of liquid assets. That has been seen as a boon for the market, but Ahern says it could be given more support.
“Last year, more than $500 billion worth of securitisations was transacted globally – that’s the fifth year of annual growth. So it continues to be an active market but one that’s not being fully exploited as a solution for the liquidity and funding gap going forward,” he says.
This article was first published on Risk