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Several European institutions appear to share an emerging consensus on using regulation to boost securitisation to the SME sector, but progress could be challenged by regulatory work already in progress.
The ECB's Benoît Cœuré gave the most explicit endorsement yet from the central bank of the securitisation market, lending support to the Prime Collateralised Securities initiative, a transparency initiative for securitisations developed by AFME. "Securitisation offers an opportunity for the custodians of large pools of European savings, i.e. insurance and pension funds, to channel resources to SMEs...the efforts put in place in the PCS initiative should be commended", in a statement dated on Thursday.
His comments chimed with pressure from the European Commission, which made its thoughts on SME securitisation clear in the Green Paper published two weeks earlier, and launched by European Commissioner Michael Barnier. This paper argues that "Reshaping securitisation markets could help unlock additional sources of long-term finance" - a view echoed at a roundtable bringing together European Parliamentarians Othmar Karas and Corien Wortmann-Kool.
EIOPA produced a discussion paper on this issue this week, but effectively argued that it could not distinguish between securitisations purely on the ground of what they were financing. EIOPA said it was continuing to work on calibrating spread risk for SME securitisations, using the Markit Floating Rate European ABS European SME CLOs Index for price history.
By contrast, the latest draft of the EU's vast new bank regulation, the Capital Requirements Regulation, reduces capital charges for SME loans without any reference to relative risk, purely in order to incentivise lending - a specific attempt to tilt the credit playing field in favour of SME borrowers.
The new insurance capital framework, Solvency II, moves the insurance industry to a risk-based capital framework, much like Basel II for banks - despite the fact that bank regulation is already rowing back from this approach.
It weights securitisation positions according to historical price volatility, but draft versions so far have calibrated this risk with heavy reference to price volatility in US subprime RMBS from 2007-2009. This means all securitisations are treated as extremely risky under the framework. Whole loans, for instance, are considered less risky than senior tranches of securitisations of exactly the same loans.
While Solvency II has been delayed many times already, the current schedule is to begin implementation from 2014 (although this is likely to be delayed to 2016 at least). That means EIOPA has little time to revise the framework yet again if it is to hit the deadline, and potentially reduces insurers' willingness to allocate funds to securitised SME.