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Villain of the last crisis, hero of this one

By Tom Brown
06 May 2020

Europe’s SMEs are in trouble. The coronavirus pandemic has zeroed revenues and threatens their very existence. They last faced a big threat in the 2008 crisis when bank lending dried up and a recession took hold. Back then, securitization took a lot of the blame as the cause, but this time it offers a route to rescue.

Way back when conferences used to happen, a chief executive at the 2019 True Sale International shindig described the significant risk transfer (SRT) market as insurance for banks' loan portfolios.

But for much of the preceding decade, regulators had viewed the market with suspicion. The safety it was supposed to have provided turned out to be non-existent during the 2008 financial crisis. Thereafter anything that bore a whiff of credit derivatives, tranching and three letter acronyms fell out of favour.

Though securitization came back into the fold under the ‘simple, transparent and standardised’ (STS) framework, this lacked any provision for SRT deals, prompting a further drive from the market to improve its treatment.

Now the market is rehabilitated just in time to save Europe’s small and medium sized enterprises (SMEs). The European Investment Fund (EIF) — part of the EIB no less — is offering state-backed insurance, hoping to dampen the impact of the coronavirus on the SME sector.

The EIF has completed its second SRT project in Romania, propping up SMEs and encouraging bank lending. The project was tweaked in light of the pandemic, and more SME guarantees are in the works for five other member states.

The same financing blamed for destabilising the European economy in the last crisis may now be used to rescue it.

Now, the European Banking Authority has finalised its STS framework proposals for the SRT market, perhaps a sign that the stigma attached to the market is finally beginning to thaw.

There were obvious problems with pre-2008 securitization. But the market survived, adapted and is now proving those that wanted to kill it off wrong. One era’s financial terrorist is truly another’s freedom fighter.

By Tom Brown
06 May 2020