SECURITISATION WAS PUSHED firmly back onto the capital markets agenda this past week. The tripartite Joint Committee of the European Supervisory Authorities unveiled its chunky report on the topic, while on the same day ESMA chairman Steven Maijoor singled it out for special mention – along with crowdfunding – in his speech on Capital Markets Union at the Luxembourg Stock Exchange Day.
Highlighting securitisation was, I imagine, linked to the unveiling of the report, so I shouldn’t overplay the fact that Maijoor didn’t talk, for example, about the broader topic of SME funding. But I do sense that as debate evolves around European capital markets, too many people may perhaps be nailing their colours too firmly to the mast of securitisation. It’s a wonderful tool if used properly, but will it act as a major catalyst for banks to resume lending?
I worry that potentially unrealistic expectations are being created as we head towards Europe’s policy-driven future as a more effusively capital-marketised economy. But that’s not what the regulators are focusing on and in all fairness Maijoor’s comments were eminently reasonable, if carefully framed.
The securitisation channel “has been changed fundamentally in response to the financial crisis,” he said. “These changes include, for example, skin in the game for those who originate securitisations; more disclosure to allow investors to assess the credit quality of the underlying loan portfolios; and the introduction of regulation and supervision of Credit Rating Agencies by ESMA, which should result in increased quality of securitisations ratings.
“Hence, any further changes to securitisations should build on, and be consistent with, the regulatory reform already under way for securitisations.” Spoken like a true regulator!
I worry that potentially unrealistic expectations are being created
REGARDLESS OF THE policy debate, the poor state of the European securitisation market viewed through primary issuance numbers is rather arresting. Global issuance of MBS and ABS year-to-date has been just shy of US$300bn and the two markets are split right down the middle. Europeans accounted for just over 12% of mortgage-backed and around 22% of ABS/CDO issuance. The US, by comparison, accounted for 82% and 60% respectively.
Beyond the fact that the US and European markets are at different stages of the recovery cycle, the US mortgage model clearly plays into the US numbers: half of all US MBS is GSE paper (Fannie Mae, Freddie Mac and Ginnie Mae). Short of a radical change in how Europe funds house purchases, matching the US dollar for dollar is not a valid exercise.
But even with residential and commercial property prices shooting ahead of economic growth, European RMBS issuance year-to-date is less than US$10bn. And if you look at where Q1 2015 ranks against the same periods of the pre and post financial crisis period, performance this year is running broadly flat, and way off the US$70bn of Q1 2007. But none of that is on the ESA’s radar screen; the nine recommendations laid out in its report focus on more operational issues:
• harmonising due diligence and disclosure requirements within the EU;
• complementing that with a comprehensive regime for supervision and enforcement;
• standardising and centrally storing investor reports that fully reflect the dynamics of structured finance investments; and
• empowering investors to conduct their own stress tests.
PEOPLE SUGGESTED I was a bit mean to the regulators last week in my comments on their report on risks and vulnerabilities in the EU financial system. I’m not so sure, but I’ve got to say the latest one on securitisation ticked a lot of the right boxes.
It didn’t set out any grandiloquent theses, make any bold predictions, or re-frame the policy debate, but it served the very useful purpose of pulling together all the regulatory strands. And it did a great job in tidying up and highlighting the links, crossovers, differences in definitions and inconsistencies around what is a pretty messy series of directives and regulations. Think Prospectus Directive, CRR/CRD IV, AIFMD, CRA Regulation, Solvency II and central banks’ collateral frameworks. As an exercise in co-ordination and comparative analysis, I thought it did the trick.
One thing that was not new but was made more than crystal clear is that a lot of the burden for creating and maintaining market momentum is intended to transfer from sell-side dealers and rating agencies to the buy-side. Onerous data gathering, collation and aggregation requirements; deeply granular loan-by-loan collateral statistics and performance data, standardised reporting templates and centralised public reporting all point to a fairly dramatic shift in expected buyside behaviour.
Of course, transparency, standardisation and harmonisation are fabulous things to have in your toolkit – but only if you can make use of them. I question whether the buyside will be ready or willing to spend the time, hire the people, engage in the dynamic due diligence, run the analytics, do the credit assessment and conduct the stress tests regulators clearly expect of them. I’m talking here about the broad swathe of real-money accounts that will be expected to buy this stuff if we see a resumption in activity.
I can fully understand why policymakers, still shaking from the fallout from the financial crisis, have gone down that track and want to empower buyers to take control. But in the land of Realpolitik, I wonder if it misses the point in terms of how some (many, most?) investors do their jobs. It’s doubtless well intentioned, but is it a case of forcing power on people who don’t really want it?
