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Synthetic ABS's comeback is an organic development

By David Bell
05 Jan 2017

With pressure on banks to tighten their belts and deleverage balance sheets, in 2017 synthetic securitization could become a much bigger part of the bank treasurer’s toolkit.

The market for synthetic securitization burst back into life last year, with banks lining up to structure private deals to trim fat from their balance sheets and satisfy investor demand for yield.

This year could see the synthetic ABS market build even greater momentum, at a time when balance sheet management is becoming increasingly acute for treasurers.

The European Central Bank’s targeted review of internal models (TRIM) and the “Basel IV” framework, whose final calibration was postponed this week, are both expected to result in higher risk weights for banks and swollen balance sheets, heaping further pressure on banks to offload the risk of non-core assets.

While there is more than one way of doing this, more banks are likely to look at structuring synthetic risk transfer deals, if they are not already doing so. This is good news for Europe’s securitization market, showing that synthetic structures can shake off the stigma of the financial crisis and become recognised by regulators and rating agencies as a useful, prudent balance sheet tool.

But synthetic deals are generally private and often bilateral. Some industry advocates might not welcome the growth of another side of the private ABS market and the continuing shrinkage of the public market.

However, with public ABS deals struggling to compete with an array of cheaper funding alternatives, and a pressing need for capital relief options, this is a trend that should be embraced.

By David Bell
05 Jan 2017