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One solution to malfunctioning credit channels to the real economy could be for firms to bypass the bank lending channel and replace bank finance with capital market finance. This trend has already been observed for larger corporates, with European corporate bond issuance expanding rapidly in the last few years. However, for SMEs accessing non-bank finance is often simply not an option. Indeed, non-specialised investors and lenders are often wary of firms facing high degrees of competition and limited growth prospects, particularly if those firms have only existed for a short while. The key question then becomes, in the context of an already-accommodative monetary policy stance, how the role of banks in providing SME finance be structurally improved? There are two channels:
SME loan securitisation - what can be done to stimulate these markets? First and foremost, it is important to recognise that ABSs come in many shapes and colours, and therefore ABSs can be structurally different in terms of risk profile. From the various statements made by myself and also the ECB-President in recent months, I think it is clear to everyone that the ECB feels that EU ABSs are being treated inappropriately by present regulations and proposals.
The securitisation 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, does not reflect the structural differences across ABS deals, and does not reflect the vastly-different default performance of SME ABSs at the European and global level. Nor can the proposed calibration fully reflect the future benefits of recently-adopted regulatory enhancements.
The revised securitisation framework should reflect the risk-mitigating features of high quality securitisation. It is therefore important that the EU moves ahead swiftly in addressing inconsistencies in the treatment of high quality securitisation.
Securitisation instruments should be distinguished into several categories, and preferential treatment assigned only to instruments meeting the strictest requirements. The key question of course is what criteria to use. In order to avoid too much regulatory complexity, a principles-based approach would makes sense. Central bank ABS eligibility criteria could form a useful starting point for identifying ‘qualified’ ABSs. This is because these criteria are determined using a common risk-tolerance threshold, are widely-accepted by market participants, and are set without conflicts of interest.
Having defined criteria for so-called ‘high-quality securitisation’, the next step is deciding what treatment to grant. There is more room to manoeuvre than is generally recognised. For example, supervisory parameters can be adjusted in the current securitisation proposals. Or, there is always the option of adopting straightforward preferential risk weights in a similar manner to covered bonds in the Capital Requirements Regulation. These arrangements could then be reviewed should the Basel Committee reach an agreement on a similar framework.