MY VIEWS ON private placements seem to have caught the imagination, as I received a ton of spirited feedback to last week’s column on the matter – including from someone who reckons the entire European private placement initiative is barking up the wrong tree.
Having spent a ton of time focusing on the relative benefits of the PP aspect of the European Union’s planned capital markets union, though, I must say I was delighted with the timing of the European Commission’s February 18 consultation document – an EU framework for simple, transparent and standardised securitisation. It provided me with a perfect variation on my theme, and I’m tickled by the (probably fanciful) idea that it came out of the blokes sitting in the office next door to the PP guys as some kind of ripple effect along the CMU wing of the EC building.
I still find it hard to take the political excitement about securitisation too seriously – in fact, it’s all rather amusing given where we’ve come from. The paper makes some odd assumptions about market behaviour. For example, it specifically targeted investment banks’ originate-to-distribute models for securitisation as being a key contributor to the global financial crisis. That’s ridiculous: OTD wasn’t ever the issue, it was what was being distributed that was the problem. And in criticising OTD, the paper argues against itself as one of the key benefits it sees of a standardised high-quality label for securitisation is distribution to institutional investors as a key plank of risk transfer.
Also, sporting a clearly anti-credit rating agency bias, there is an assumption that one outcome of the initiative will be to provide data and other aspects of transparency to enable investors to do their own due diligence without reference to outside sources and make investment decisions under their own steam. I don’t know about that.
The sheer weight of comment and consultation already out there from various public agencies is just incredible
Beyond that, though, the topic has become so heavily over-engineered. The sheer weight of comment and consultation already out there from various public agencies is just incredible.
Reading through the latest EC paper, I was taken with how many references it makes to what’s out there and the inter-operability and inter-dependability of the various streams. So we have the joint ECB/Bank of England consultation; the BCBS-IOSCO cross-sector task force on impediments to securitisation; the EBA consultation; the Joint Committee of the European Supervisory Authorities’ review of the existing EU framework; and the BCBS’s revised standards that are considering how to incorporate the BCBS-IOSCO criteria. And the EC paper is considering using the revised BCBS framework as a baseline for its own review of EU rules on capital treatment.
And within the EU, a page-long list of directives already covers the bits of securitisation relevant to banking, insurance, asset management and credit ratings. It’s pretty fragmented. I do wonder why there’s so much.
THERE’S NOTHING INTRINSICALLY wrong with the idea of defining simple, standardised, high-quality securitisation if it helps comparability. That means no re-securitisation, no synthetic securitisation, no opaque or complex assets, no mezzanine tranches, no short-term assets, no mechanistic reliance on external credit ratings, no mixed underlying collateral pools, derivatives for hedging only etc.
But, just as I noted that the lack of standardised documentation wasn’t the biggest factor holding back the emergence of European private placements, the lack of fungibility between various types of securitised assets and between jurisdictions is, in my view, a bit of a detail in the evolving debate.
While the latest EU consultation document sets out some sensible areas for comment, I just don’t see the market blossoming in quite the same way as the politicians and technocrats in Brussels clearly do. Just like PPs, ABS/MBS will undoubtedly offer some funding-cum-regulatory-capital-relief solutions for banks, as well as diversification options for institutional investors. But I don’t think it’ll be in the quantum expected or required to provide a sufficiently robust bulwark against the EU’s hardline view that bank liquidity will wane inexorably into the future.
The EC paper quotes a stat that if EU venture capital markets were as deep as the US, as much as €90bn more in funds would have been available to companies between 2008 and 2013. Don’t know where they got that from. And would that have made a fundamental difference to the regional funding landscape. Doubtful.
ON THIS BANK liquidity point, there is, of course, a bigger issue out there. If the withdrawal of bank liquidity is a given, it’s certainly not because of the political view that banks are somehow being difficult; it’s down as much to the heavy hand of banking over-regulation. The people who came up with super-stringent bank capital, liquidity and leverage rules in order to solve yesterday’s problem have in effect done with the notion of banks as a cheap bridge to finance economic growth and entrepreneurship.
The people who came up with the over-zealous regulatory minimums are now in some respects pitted against those who are trying to stimulate credit flows. The EC paper is floating the idea of lower capital charges for qualifying securitisations; dispensing with skin-in-the-game retention rules; and loosening capital treatment of investors. Which all makes sense given the transparency required behind any formal definition of high-quality securitisation. They’re thinking, too, about taking a steer from the covered bond market and launching a labelling initiative.
The consultation runs for three months. Responses are due in by May 13. Get writing.
