CMU could be ‘paper tiger’ if simple securitization plans don’t hurry: MEP

The Capital Markets Union project risks becoming a “paper tiger” unless faster progress is made on the “simple, transparent and standardised” (STS) securitization framework, said influential Dutch MEP Cora van Nieuwenhuizen on Thursday.

  • By David Bell
  • 21 Apr 2016
Email a colleague
Request a PDF

Van Nieuwenhuizen told GlobalCapital at the IIR Dutch securitization event in Amsterdam on Thursday that she was frustrated with the pace of the framework’s progress through the European Parliament.

She said that many politicians still viewed the asset class with suspicion, despite the strong performance of European securitizations during and since the financial crisis. Van Nieuwenhuizen sits on the key Committee on Economic and Monetary Affairs (ECON), which is responsible for financial regulation, and she is a member of the centre-right People's Party for Freedom and Democracy.

“There’s a very common perception on the left of the European Parliament — even within the economic and monetary policy committee — that it is bad, and risky.” Challenging this perception is “an uphill battle”, she said after delivering a keynote speech at the conference. “It’s frustrating that Parliament is moving so slowly after the Council had moved so quickly to push the proposal through.”

A draft framework for “simple, transparent and standardised” securitization is not expected to be presented for a vote in parliament until January 2017. Securitizations which meet this standard will benefit from better regulatory treatment, raising hopes that once the legislation is on the books, many more investors will return to the market.

Paul Tang, another member of the ECON committee and a member of the Group of the Progressive Alliance of Socialists and Democrats, is the MEP responsible for drawing up the draft proposal.

The large number of detailed technical questions being asked by Tang were “not at all essential at this stage”,  and were likely a delaying tactic, van Nieuwenhuizen said. “It doesn’t give me the feeling he wants to proceed,” the MEP said.

Van Nieuwenhuizen said that parliament could have “easily” produced and agreed a compromise text before the start of the summer recess in July. The proposed January vote “implies an unnecessarily long process that does not properly reflect the urgency of this file,” she said in a keynote speech to the conference.

The STS framework, van Nieuwenhuizen said, was the “single most promising and concrete part of the Capital Markets Union” project. Securitization had a key role to play in helping banks deleverage their balance sheets without having too negative an impact on the provision of credit to the real economy, she said.

But unless politicians focus on making progress with key initiatives such as STS, the entire CMU project risked becoming a “paper tiger”, she said. She added that members of the European Commission had voiced concerns and frustration with the “unwieldy” nature of the CMU project.

Support for synthetics

In the keynote speech van Nieuwenhuizen said there were two key issues that would determine the success of the STS initiative. The first is how widely available the label would be. She said that certain funded synthetic securitizations should also be able to benefit from improved treatment under the STS label because of their ability to aide bank deleveraging and as a means of improving financing conditions for small and medium enterprises.

Synthetic deals would not qualify for the STS label under the current draft of the proposals, despite a paper from the European Banking Authority arguing last December that the senior tranches of balance sheet synthetic securitizations backed by SME loans and retained by the originating bank should also benefit from favourable treatment under the label.

Speaking later at the conference, Christian Moor, policy advisor at the European Banking Authority, said that synthetic securitization suffered from a “double stigmatism”. He said the EBA published its paper in December after six months of research which showed that there was no evidence to suggest balance sheet synthetic deals performed materially worse or better than true sale securitizations. He distinguished these from arbitrage deals such as “CDO squared” which had performed poorly.

Despite this support the chances of including synthetic deals in the STS framework look slim. Synthetic securitization was something that the STS rapporteur Tang "hates", van Nieuwenhuizen said in her speech. 

Third party attestation

In her keynote address, van Nieuwenhuizen said the second key to helping the STS framework have a meaningful impact was to make it possible for the attestation of STS eligible deals to be outsourced to a third party. The Commission’s proposals allow for self-certification, with the onus on the deal sponsor, originator and servicer to provide a notification that a deal meets the criteria.

Van Nieuwenhuizen said that there were legal risks and uncertainty involved in self-certification that could undermine the aim of the framework to boost the securitization market. A third party attestation amendment could help overcome this, though rules were necessary to ensure against creating “perverse incentives” for third parties in the system, she said. 

‘The market is dying’

In her speech, van Nieuwenhuizen urged the European Parliament to be ambitious with the STS framework, and said that she wished quicker change was possible with other initiatives such as the Solvency II regime, which has caused insurance companies, a bedrock of the investor base, to steer clear of securitization investments as a result of punitive capital weightings.

The need for urgency was also reflected in audience questions, with one conference goer complaining that industry efforts to educate politicians about the market were seemingly going unheeded.

“You get the feeling that it doesn’t matter about the content anymore, it’s more about politics — left versus right,” he said. “In the meantime, the market is dying. Trading desks are leaving the industry, investors are leaving the industry. In all honesty we don’t have time to wait until 2017,” he said.

  • By David Bell
  • 21 Apr 2016

GlobalCapital European securitization league table

Rank Lead Manager/Arranger Total Volume $m No. of Deals Share % by Volume
1 BNP Paribas 10,542 20 18.00
2 Bank of America Merrill Lynch (BAML) 6,103 21 10.42
3 Citi 5,130 13 8.76
4 JP Morgan 4,681 6 7.99
5 Lloyds Bank 3,389 13 5.79

Bookrunners of Global Structured Finance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 70,706.73 201 11.50%
2 Bank of America Merrill Lynch 60,472.76 166 9.84%
3 JPMorgan 48,700.30 139 7.92%
4 Wells Fargo Securities 48,082.68 138 7.82%
5 Credit Suisse 38,376.65 95 6.24%