Hopes are growing that two key initiatives by European policymakers will lead to the rehabilitation of securitization as an asset class that has been out in the cold since it imploded after the 2007 subprime crisis.
The European Commission last week unveiled plans to treat certain securitizations more kindly under bank and insurance regulation, while the European Central Bank announced plans to buy asset backed securities as part of a package to rekindle a flagging European economy.
“We hope that a series of co-ordinated measures are implemented to not just to bolster appetite for ABS in the near term but, through lower funding costs and greater liquidity, act to change the longer term dynamics of the market,” said Mark Hale, chief investment officer at Prytania Investment Advisors.
“We might then enjoy more issuance over a wider range of sectors and obligors, as ABS becomes a relatively cheap, flexible and reliable source of funding for consumers and businesses. If ABS public issuance could double or triple in volume from the sub-€100bn annually that we have had since the 2008 credit crisis, then that could go a long way to easing the credit logjam in the European financial system.”
On Friday the Commission for the first time announced definitions of high quality securitizations under Solvency II regulations governing insurance companies — giving certain pieces of debt, likely to be the senior tranches of conservative and transparent structures, a lower capital charge.
It also expanded the types of securitization that banks can hold as level 2b high quality liquid assets in their liquidity buffers beyond residential mortgage backed securities to include those backed by auto loans and leases, SME lending and consumer loans. That should boost bank treasury demand for those assets.
The announcements mark a further mellowing towards ABS after the ECB announced at the beginning of the month it would begin to buy eligible euro denominated ABS tranches in primary and secondary markets in the fourth quarter, alongside a programme of covered bond purchases which will begin in the second half of October.
The central bank has also indicated it could buy mezzanine tranches if they have a sovereign guarantee — although it has yet to announce details of the eligibility criteria.
“Even if this just occurs in a few countries in the periphery, the impact of this could be material for those nations,” said Hale. “It could help banks shrink their balance sheets, give them capital relief and free up capacity for new lending to consumers and small businesses.”