10 December 2013

FT: BoE policy-maker backs 'bogeyman' of bundled debt

Andy Haldane, the BoE's executive director for financial stability, says securitisation should play a role in boosting credit to small and midsize companies. The central bank is interested in reviving the securitisation market as an option for financing growth. (Includes comment from AFME/Lewis.)

Haldane said securitisation could be the “financing vehicle for all seasons” if proper standards are maintained and said the BoE wanted to throw its weight behind its use in SME lending and other areas, including student loans. “In a world where we are squeezing risk out of the banking system we would want a simple, safe, vibrant set of channels for non-bank financing to emerge and securitisation is one of those", he said. “We are talking about simple and safe structures, rather than complex and shadowy ones.”

The BoE’s Financial Policy Committee last month said it was examining impediments to securitisation markets, arguing that it may be suffering from “lingering stigma” and banks’ efforts to shrink their balance sheets. Mr Haldane stressed the BoE is still at the “scoping stage” as it gauges possible interventions. One problem was that while there was good information on the credit histories of households, the same was not the case for SMEs – unlike in many other European countries.

If a credit registry were set up to collate granular detail on individual SME loans it would facilitate the construction of data models needed to bundle up and sell loans, Mr Haldane said. Better information would also facilitate the entry of new lenders into the field, reducing the stranglehold of incumbents.

Other possible steps include setting underwriting standards or creating a platform that “sucks in the loans and spits them out as instruments". Providing underwriting standards are maintained and products do not become overly complicated, it was an instrument that can “airlift assets off the balance sheets of banks, freeing up capital, and airlift them on to the balance sheets of real-money investors” – namely insurance companies, pension funds and sovereign wealth funds.

Other activity outside the traditional monetary levers of the central bank has included the FPC’s recommendation to force mortgage lenders to use stricter interest rate scenarios when they judge the affordability of loans, and the BoE’s withdrawal of a waiver on bank capital requirements for new household lending. The ambition behind this approach is to take some heat out of the housing market and prevent a bubble before it emerges – “popping rather than mopping”.

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Responding in a letter on 12 December, AFME's Simon Lewis writes:

Andy Haldane’s well-timed call for a securitisation “revival”, together with a recent similar call from Yves Mersch of the ECB, provides the strongest endorsement so far of the positive role that high quality securitisation can play in today’s financial markets.

Securitisation in Europe has changed. New regulations, combined with industry initiatives such as the prime collateralised securities (PCS) label for high-quality securitisations, require and encourage better alignment of risk, greater transparency and less reliance on credit ratings. However, for the European securitisation market to revive, it urgently needs more balanced and evidence-based treatment of high-quality securitisation under Basel and Solvency II capital rules, as well as fair treatment under the new liquidity regime of the Capital Requirements Regulation. In addition, better co-ordination of securitisation regulation between global, regional and national regulators and policy makers would help meet the challenge of reviving markets to support growth while preserving stability. If these two hurdles can be overcome then a restored market for high-quality securitisation will be able to play its full part in providing funding for Europe’s economic growth.

Full letter (FT subscription required)

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