Securitisation has become a dirty word in many parts of the world, often for good reason. Nowhere is this more true than in continental Europe.
French money market funds and German Landesbanks loaded up on ABS and many were burned badly, in the latter case driving banks to collapse. France and Germany have been the harshest critics of the laissez faire approach to capital markets dubbed the “Anglo Saxon” model, and were the driving forces behind the tough new rules for securitisation imposed by the European Union.
So when Günther Braünig, member of the managing board of Germany’s state owned development bank KfW, said on Monday that he wanted to “strike a blow for securitisation”, you could be forgiven for being surprised.
KfW itself has seen the sharp end of securitisation’s excesses, having had to pick up the pieces when IKB was brought down by its structured investment vehicle and asset backed commercial paper conduit.
But it is also well aware of the benefits of securitisation — before the crisis KfW was a regular sponsor of securitisations of residential mortgage and loans to small and medium sized businesses through its Provide and Promise programmes.
“KfW emphasises its firm commitment to securitisation as an economically useful instrument,” said Braünig. “After all, the lack of securitisation opportunities is one reason for the growing deterioration of the credit supply for KfW’s target groups. KfW therefore will maintain its securitisation activities in order to support the lending operations of banks for SMEs and private construction.”
His comments come as a welcome counterweight to the blanket condemnation of securitisation emanating from some quarters, and may help shift the debate in German political circles. The Länder and the federal government are deeply worried about the fate of SMEs in the face of collapsing trade and liquidity constraints.
“We believe that securitisation as a means of freeing up equity for banks and for refinancing makes securitisation a very important instrument in general and in particular for the financing of the SME sector,” he told EuroWeek. “I acknowledge there still are a lot of psychological barriers to returning to securitisation, and to return as if nothing had happened is definitely neither feasible nor desirable.
“What I’m calling for is to sit back and differentiate those transactions that have worked well and analyse why they have worked well, and also try to see where the shortfalls have been and which technicalities have to be avoided to prevent another subprime crisis.”
Germany’s giant and politically important car manufacturers, were also heavy users of ABS through their finance arms, and have had to turn to the European Central Bank as investor appetite for their ABS has dried up.
So far, the government has shied away from providing direct support to the ABS market along the lines of the TALF in the US or the UK’s ABS guarantee scheme, preferring instead to bail out individual institutions or support the banking sector as a whole through SoFFin, its financial stabilisation fund.
KfW’s call for distinctions to be made among types of securitisation in public debate, and for its central importance to the German economy to be recognised, may put pressure on politicians to do more to kickstart the ABS market, but the hurdles are high.
Braünig said: “In Germany we are just about to pass the new bad bank model legislation and Soffin will have the task together with those banks that are interested to put that in place. That will pre-occupy public discussion because there we have all the structures that have not worked.”
Germany has always been one of the most opaque developed jurisdictions for ABS disclosure — considered to be vital to restoring investor confidence — because of its strict banking privacy laws.
Investors even in true sale securitisations cannot have access to loan level data except in enforcement, and lawyers say that relaxing privacy laws to facilitate securitisation would be a hard sell to the German public, particularly in light of recent data theft scandals.
Consequently the industry will likely have to do the legwork itself to restore investor confidence. Braünig believes there is much issuers can do.
“We as KfW have been securitising loans that have been originated in a regulated environment and that is a very important point.
“The second point is that it is definitely important going forward that banks retain risk in the loans and the portfolios that they have originated. Third, very simple structures — no leverage — and high transparency for the investor base are required to restore confidence over time.”
It will not be an easy or a swift process by any means, but KfW argues that German banks will eventually turn again to securitisation, provided the investor base has been rebuilt.
“Banks for the time being have been heavily reliant on deposits and short term refinancing means,” said Braünig.
“I’m convinced that they increasingly have to organise their longer term refinancing; and as spreads have tightened in for Pfandbriefe and other secured lending, I think banks will restructure their balance sheets on the liability side and look more into these instruments.”
A shorter version of this article appeared on Tuesday. The above incorporates the views of KfW board member Günther Braünig.