Securitization is riding high in Europe's policy debate on how it can regain economic competitiveness and escape being left behind by China and the US.
Leading industry and political figures like Mario Draghi, Christian Noyer and Enrico Letta all mentioned securitization in their weighty reports on the problem last year.
Many politicians may be struggling to catch up. Wasn't securitization that terrible thing that caused the last financial crisis?
Anyone wrestling with this conundrum should look no further than Vida Bank as an example of how the technique can help companies grow at different stages of their lives. That is, assuming they do not disdain a UK example.
Vida began life as Belmont Green Finance in 2015 and launched a lending pilot for its Vida Homeloans brand in 2016. The company specialised in lending to customers outside the usual criteria for mainstream mortgage banks, and in buy-to-let mortgages.
Belmont issued its first residential mortgage-backed securities deal in 2017, called Tower Bridge Funding No 1.
For a specialist lender, achieving profitability often depends on growing the loan book, as new origination generates fees and interest income.
But a lender also needs funding, which means leveraging assets. With a short track record, securitization can offer the cheapest, most plentiful source of funds, with notes rated up to triple-A.
That enables origination to stay rapid, and the lender can retain junior tranches to earn income.
That was reflected in the structure of Tower Bridge 1. Classes from senior ‘A’ to the junior mezzanine ‘E’ were sold and GlobalCapital reported at the time that the mezzanine tranche was “heavily bid”. Other deals followed in a similar style.
The depth of the UK RMBS market is one of the main reasons why UK specialist mortgage lenders have been able to proliferate in recent years. To the mortgage market they have brought product innovations, ranging from an expansion of second lien mortgages to loans designed for people in later life.
Building bridges
Seven years on, after another 12 visits to the RMBS market, last November Vida achieved its long held ambition and gained a banking licence, entering a new phase of its life.
Last week, Vida came to the RMBS market as a bank for the first time. It has left the old Tower Bridge shelf behind and started a new programme, London Bridge.
Vida’s office on Battle Bridge Lane is on the south bank of the River Thames, about halfway between the two bridges.
As a bank, Vida will face different constraints from those affecting specialist lenders.
Less than six months after getting its licence, Vida had managed to raise £1bn of deposits, illustrating how much easier it is as a bank to obtain regular funding.
In future, the main constraint to Vida's growth is likely to be availability of capital.
Those differences are reflected when comparing London Bridge with Tower Bridge. This time Vida did not stop at the junior mezzanine, but sold all the tranches from triple-A notes to residuals and call rights.
That means it can derecognise the assets from its balance sheet and achieve capital relief. Vida can then make fresh loans with the same capital.
Securitization may not be as essential to Vida's survival as it is for specialist finance companies, but it is a very useful option as it tries to accelerate growth.
Even though it can now attract deposits, securitization is also still useful to Vida for funding — as demonstrated by it selling the triple-A notes in last week's transaction.
Vida may even do a triple-A-only deal in future for funding purposes, its treasurer told GlobalCapital.
Having diversified funding options is always helpful to banks. And for now, RMBS is Vida’s clearest wholesale funding route. If it seeks a credit rating of its own, that might open up more options in future.
Securitization has played an indispensable part in Vida’s journey from start-up specialist lender to bank, and it is likely to remain important as this new bank grows.
For anyone wondering what the hype is about, and what securitization can offer the economy, it is an instructive tale.