Celent Securities & Investments Newsletter, August 2012
Analyst's Point of View
At the Global ABS conference that took place in June in Brussels, the focus was not agreeing on deals but debating regulatory reforms that are slowly killing this market.
Indeed, the European ABS market is under threat from the Solvency II and Basel III regulations. The former because, by 2014, it would in essence make insurance companies divest from asset-backed securities, and furthermore not invest any more in ABS that will incur 10 times the amount of capital charge that covered bond holdings would. The latter because eligibility of ABS under Basel III liquidity coverage ratio (LCR) is uncertain, therefore pushing buyers away from securitisation and into other assets such as covered bonds. Capital charges that banks have to keep for holding highly rated securitised products are also too low compared to what insurance companies have to keep for the same assets, clearly giving an advantage to banks investing in ABS. But are insurance companies not more stable and long-term investors that one would dream of having?
The fact of the matter is, regulators fear ABS since the US subprime crisis. But demand from investors over the past four months has been higher than over the past years in some segments of the market. Why? Because if one is savvy enough to value these assets properly and buys only diversified portfolios, the yield they provide is high. Also European ABS have performed better than US ABS since 2007. FitchRatings has calculated that since 2007 30.3% of US structured finance tranches have realised losses, whereas only 2.7% of the European ones have done so.
If education is key, let's try to explain the positive impacts ABS can have on the economy. To create an ABS, banks pool assets they have on their balance sheet such as credit cards, mortgages, and consumer loans; they wrap it with a nice bow in a Special Purpose Vehicle (SPV) and then sell it to investors that are willing to buy it (yes they are!). This means that banks are transferring these assets to someone else; in essence, they are moving the risk away from their balance sheet.
Balance sheet... let's see, isn't it an issue for European banks these days? Are our economies not struggling because banks cannot take any assets on their balance sheet, and therefore cannot lend to corporations so that they can keep investing and stay competitive, and cannot lend to you and me so that we can buy a flat or consume more and relaunch the economy?
Does it make sense that, while banks struggle to use their balance sheet and are less able to provide credit directly to the economy, there is no regulatory incentive to enhance their capacity to pass on the credit risk to the market via securitisation? Is the European regulatory pipeline not overly concentrated on banks' survival and not on the economy's revival? Could European governments lend a hand to at least help trigger more issuance of SME and consumer loan products?
Fortunately the above mentioned regulations are not final; some working groups are trying to agree on something that will not threaten the securitisation industry further. But for our economies, time is running out.
Joséphine de Chazournes
Chart of the Month
From the Celent report The Global Private Equity Market: Rationalization and Regulation
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