Papadia Says Transparency, Simplicity Key To Securitization’s Comeback

Francesco Papadia, director general of the directorate of general market operations at the European Central Bank, prescribed simpler deal structures and greater disclosure for the securitization markets at the Global ABS 2009 Conference in London this morning.

  • 02 Jun 2009
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-- Olivia Thetgyi

Francesco Papadia, director general of the directorate of general market operations at the European Central Bank, prescribed simpler deal structures, greater disclosure and secondary market transparency to restore investor confidence. The remarks were made in his keynote address at the Global ABS 2009 Conference in London this morning.

Papadia first noted the ECB’s intervention had helped and that conditions had improved in the money markets. “I think we have managed to avoid that crisis leading to a complete gridlock of entire system, which would have led to catastrophic consequences for the entire economy,” he said. As a sign of improvement, he cited the shrinkage of the spread between three-month Euribor and swap rates to 50 basis points from 180 bps at the height of the crisis. He also noted the volume of banks accessing liquidity through the ECB had fallen over the past eight weeks to €600 billion from a peak of €E850 billion. Additionally, now only 500 banks are tapping the bank for financing, down from 800.

But Papadia noted that the ECB’s support of the market could not go on forever, given the maturity mismatch between the bonds and the repo terms. Plus, he conceded that such support removed the private market’s incentive to provide such financing. To bring back that private demand, rebuilding investor confidence is key, he said. “I think a crucial element for the revitalization of the ABS market is that the investor base is broadened and institutional investors are attracted which have a buy-and-hold long-term horizon,” he said.

To do so, the market needs to do away with overly complex structures, Papadia said. “Securitizations have become ridiculously complex... One component of [securitization being properly used and managed] is structures should become simpler, plain-vanilla deals with clear assets.” He warned that the ECB was unsatisfied with the transparency of many existing asset-backed securities. “As a collateral taker, we are not happy with the transparency standards of many ABS transactions, including or in particular for those that have been created for the sole use of using them as collateral in eurosystem purchases without the hope of being placed with investor,” he said.

The ECB has been working with rating agencies to improve deal surveillance and introduce loan-by-loan data, Papadia said. “Our hope is this increased transparency will be an important component of restoring confidence to investors,” he said. In audience questions afterward, however, he shied away from saying the ECB would make loan-by-loan data part of its collateral posting requirements. “This is something we would look at; I didn’t say that we would require that.” He continued, “Loan-by-loan information is a component of a good securitization market. If you buy something that has single recourse, you want to know what you are buying, of course.” He said they were also looking at defining disclosure standards, and recognized the European Securitisation Forum’s efforts in this respect.

Papadia’s last recommendation for getting the securitization market back on its feet was providing secondary market transparency. Dealers have long opposed post-trade reporting, saying disclosing prices soon after completing bond purchases that took weeks or months to complete takes away their incentive to make markets. “I firmly believe post- trade transparency is an essential component of viable secondary market,” he said.

  • 02 Jun 2009

GlobalCapital European securitization league table

Rank Lead Manager/Arranger Total Volume $m No. of Deals Share % by Volume
1 Citi 3,237 10 19.12
2 Goldman Sachs 2,096 5 12.39
3 Morgan Stanley 1,965 5 11.61
4 BNP Paribas 1,686 6 9.96
5 Barclays 1,565 4 9.25

Bookrunners of Global Structured Finance

Rank Lead Manager Amount $m No of issues Share %
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  • Today
1 Citi 33,499.81 106 11.84%
2 JPMorgan 26,026.16 75 9.20%
3 Wells Fargo Securities 25,325.15 70 8.95%
4 Bank of America Merrill Lynch 23,157.33 74 8.18%
5 Barclays 17,494.57 59 6.18%