Legislation puts European securitization on the comeback trail
Hopes are high that a newly negotiated securitization framework, a new Capital Markets Union and investment incentives can restore and revitalize the market for high-quality securitization.
According to data from the Association for Financial Markets in Europe (AFME), securitization issuance in Europe remains well below the average from 2001 to 2008. A successful revitalization will depend on the results of discussions among the European Commission, Council and Parliament on legislation for a new securitization framework.
Crucial talks will focus on the level of due diligence that investors are required, able and willing to conduct; the possibility of third parties being used to check if simple, transparent and standardized (STS) criteria are being complied with; and the risk weights and capital charges for STS securitization positions being set at a reasonable level.
The creation of a market for high-quality securitization is one of the key objectives of the European Commission's initiative to build a Capital Markets Union. If STS securitizations are intended to be a cornerstone of that project, the criteria for asset-backed securities and asset-backed commercial paper (ABCP) transactions and programs must be revised and clarified. The market also needs to adopt a more consistent regulatory treatment of banks and insurance companies.
Revitalization demands incentivizing insurance companies to invest in securitization positions again. With European insurance companies boasting investment capital of almost €10 trillion at the end of 2014 (according to Insurance Europe), investing just five percent of this in securitization positions would provide a €500 billion boost to the sector. Reviving the ABCP market—the volume of which in Germany alone is about €12 billion—is also an essential step to a successful revitalization.
To what extent balance sheet synthetic securitizations will be made subject to their own STS framework remains to be seen. Although they form an integral and important part of the overall securitization landscape, current suggestions only provide for a revision and a feasibility report to be provided by the European Banking Authority in close cooperation with the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority, which will not be available before 2018.