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Financing of the EU economy - Is the EU securitization proposal up to the challenges?
Revival of European securitisation market
By Turok-Heteš Roman - Director General, Financial Market Section, Ministry of Finance, Slovak Republic
The financial crises unveiled the naked truth – European economy is heavily dependent on bank financing.
This lead to a simple conclusion – We need to revive our European securitisation market as a matter of urgency. In doing so we seek to lower financing costs for small and medium enterprises (SMEs) and develop alternative funding & financing channels.
Healthy securition market endorses our efforts to have a fully-fledged and functioning Capital Markets Union in place as soon as possible. New regulation framework should encourage issuance of as well as motivate investments.
In November 2015, the European Commission unveiled its simple, transparent and standardised securitisation (STS securitisation) proposal alongside amendments to Capital Requirements Regulation (CRR). We now have a general approach and are waiting for engagement with the European Parliament.
A new framework for the securitisation will contribute and help mobilise capital by enabling banks to reduce their balance sheet size and capital requirements. It will help reduce due diligence burdens, increase investors confidence, support infrastructure and long-term sustainable projects. We are looking here at fostering of institutional investments, reducing cost of funding and last but not least strengthening of well-diversified investor base.
To address STS securitisation in the first wave is clearly our top priority. It is expected the European securitisation market could provide additional credit to the private sector of more than EUR 100 billion, if revived to pre-crisis average level of securitisation instruments´ issuance.
STS securitisation framework is closely connected with prudential requirements in CRR. Requirements on due diligence, direct risk retention requirement on originator, risk allocation in tranching process, strengthened supervision and co-operation among supervisory authorities, accent on valuation of risks, will surely contribute to the pros of the new proposal on STS securitisation framework. And the mechanistic reliance on external ratings is reduced.
Securitisation will contribute to significant mobilisation of long-term capital.
There will be two regimes – one for STS securitisations and one for non-STS securitisation. Much favourable capital requirements for institutional investors by investing in STS securitisation instruments can indeed help to revival of European securitisation market.
Specific risks of securitisation products are reduced in the current proposal of STS securitisation mainly by introduction of due diligence by investors before making investment in securitised instruments. Risk retention rules require the originators, sponsors and original lenders of securitised transactions to participate on the last tranche connected with the highest risk of default. Joint responsibility principle strenghtens the disclosure obligation to disclose all relevant information to investors and regulators. The originator, the sponsor and the issuer will be jointly responsible for notifying ESMA that a securitisation meets the requirements for the STS securitisation. Finally, there are administrative sanctions and remedial measures applied in case of failure to comply with provisions of STS securitisation framework.
Influence of new securitization regime on CMU goals will also depend on how it treats proportionality aspect. It seems to be an interesting tool for big and developed markets with history in trading with such instruments. Speaking on behalf of one of those small and extremely illiquid, I can only keep my fingers crossed for its success story.
There is no such thing as a risk-free world. Yes, we will have common set of rules for STS securitisation, but risks related to underlying assets will remain and be spread among institutional investors. Banks and insurers will have to monitor and manage their risk exposures, whereas the regulatory framework for insurers investing in securitisation instruments has not to be different.