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Financing of the EU economy - Is the EU securitization proposal up to the challenges?
Making the European structured finance market work for the real economy
By Frey Katherine - Managing Director-Structured Finance, Moody's Investors Service
Over the past several years, a consensus has formed that an efficient securitization market is important to national and regional economic growth. However, other than in a few US asset classes, the global securitization market has struggled to recover in a sustainable and meaningful fashion since the financial crisis. In Europe, issuance remains significantly below historical levels. We note that there are impediments to recovery both on the supply-side and the demand-side.
The slow recovery of the European economy and bank issuers’ deleveraging resulted in diminished lending activity, and thus a lower volume of receivables. Securitization remains uneconomic given the relatively available and affordable bank funding sources, including from central banks, senior unsecured and covered bond investors. Additionally, the adverse regulatory treatment of originators’ securitization has increased the all-in cost of issuance.
On the demand side, there are fewer real money investors in securitization, and those who remain struggle with relatively extensive and evolving regulatory requirements governing their investments.
Historically, insurance companies bought a significant portion of European securitizations. However, this pool of investors faces a major impediment to the attractiveness of securitization. Under Solvency II the capital charges against securitization bonds in the European Union are now significantly higher than that of the comparable risk and maturity for covered and corporate bonds. We consider that aligning capital charges across fixed income investment alternatives is critical to secure a full rebound of the European securitization market, with increasing capital requirements properly reflecting the incremental risk. Improving the standardization of capital treatment versus other instruments would drive economics and attract a larger investor base, an important step forward.
Improving the standardization of capital treatment versus other instruments would drive economics and attract a larger investor base, an important step forward.
Historical evidence supports our view. Highly rated European asset-backed securities and residential mortgage-backed securities performed very well, particularly given the material economic downturn in Europe. Significantly, the rating performance was comparable to that of corporate debt, which is generally evidenced by our 12-month downgrade rate (1984–2013) for global structured finance, which is in line with that of global corporates (16.6% vs. 15.1%).
Bearing this in mind, we welcome the EU Commission’s efforts to create an overarching, cross-sector, comprehensive and consistent securitization framework. If implemented efficiently, it has the potential to pave the way for increased issuance, would channel non-bank funding to the real economy and transfer credit risk out of the banking sector.