Capital Market Union (CMU) is one of the top priorities for the European Commission and a revival of securitisation is a `low hanging fruit’ that Commissioner Hill wants to pick – and rapidly!
The concept of securitisation is simplicity itself: pool a collection of small loans into a large `special purpose vehicle’ (SPV) and sell participations to major institutional investors so that citizens’ savings are effectively on-lent fairly directly to SMEs, households etc. There is no need for large lumps of bank capital to act as a risk buffer. However, the term `securitisation’ became `toxic’ in the financial crash after 2007 when US sub-prime mortgages inflicted massive losses on European investors - in sharp contrast to the minor losses on European securitisations. 16% of the worst AAA US securitisations defaulted versus just 0.1% of their EU counterparts.
However, the reputational damage was done and EU securitisation volumes still languish at half their pre-Crash levels. So a key CMU goal is to boost annual volumes by €100-150 billion or more – a powerful complement to the €315 billion investment fund. The February 2015 Consultation on what needs to be done to revive this market attracted 120 responses to define “simple, transparent and standardised” (STS)securitisation– thereby earning more `appropriate’ capital treatment. The “vast majority” of the respondents favoured this approach and a 76 page Regulation has now been proposed.
What does 'simple, transparent and standardised' securitisation mean?
· Assets in the package must be homogeneous – so all of a similar type
· No “re-securitisations”
· Loans must have a sufficient credit history to measure default risk.
· There must be a “true sale” from the originator to the SPV
'Transparent and standardised securitisation':
· Loans must have been created using the same lending standards - no "cherry-picking"
· Retention of at least 5% of the loans by the originator.
· Documents must detail the payment cascade to different tranches
· Data on packaged loans must be published on an ongoing basis.
· The contractual obligations, duties and responsibilities of all key parties to the securitisation must be clearly defined.
Full article for consultancy clients here
© Graham Bishop
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