Opening remarks by Christian Moor
Thank you very much for inviting me to this roundtable, and for the opportunity to give kick off with some thoughts and observations. I took some time to think about what I would say today, and decided to google the latest news in the area.
I started reading the latest articles with interest. The first one was from GlobalCapital, ‘SEC enforcers swoop on CLO combo notes’. Then I started to read an article from the FT, called ‘Investors flock back to credit product blamed in the financial crisis. Then you had an article in The Guardian on May 2: ‘Blackstone sues RCS owners directly over disputed headquarters sales’, which concerned CMBS and the value of property underlying it.
There was an article in Risk, saying that the EU’s new securitisation market had stumbled at the first gate due to lack of progress on the technical standards and the lack of a single European supervisor. And then, at least in Reuters, I got the first positive article: ‘Glimmers of light emerge from Europe’s securitisation slump’.
So when I read those articles I had two thoughts. My first was: Not much has changed compared to the securitisation markets before the crisis, just after the crisis in 2007 and 2008. My second thought was: ‘Thank God we now have STS in Europe’.
And now let me explain why on the one side I do not believe much has changed.
First, securitisation is still very much perceived as a very complex product, sort of a black box for many stakeholders including large parts of the mainstream media, politicians and to a certain extent by regulators and supervisors.
Second, we see that old ‘bad’ products are coming back and being branded as innovations, including ‘synthetic’ arbitrage CDOs, re-securitisations, and sub-prime. Mainly in the US I would say but, still, that’s where the problems started more than 10 years ago. Third, under the brand of fintech technology and market based lending you are seeing new originators or intermediaries entering the securitisation market, some of them not well capitalised, and with an originate to distribute model, which was one of the problems in the crisis.
Fourth some banks, not all, but some banks are using securitisation again or trying to use securitisation at a capital arbitrage tool. I sometimes see deals that claim Significant Risk Transfer, or try to claim SRT, when proposed to the SSM, and I think: ‘Guys, why are you doing this again?’
So a few things look the same as 2007, 2008, but to be fair there are some important differences. I think that the problems and the issues that I just spoke about are contained in certain niches or with certain stakeholders in the market, and haven’t affect the whole market as we saw pre-crisis.
Also, many of these issues are now less in the banking sector, and more in less regulated parts of the market. But you only need a few things to happen, a couple of deals to blow up, and you will immediately have the sceptical media, politicians and policy makers claiming that they were right not to trust securitisations, and the damage is done again. So the market must be careful. So now let me explain my second and more positive thought. ‘Thank God we have STS in Europe’. In my view, the STS framework has highlighted some benefits of securitisation, and for the first time in many years has shown securitisation in a positive light. The message of securitisation’s role in funding the real economy has been very well received in Brussels and has opened many doors.
It has destigmatised the word ‘securitisation’ and has given the market a quality label. And it has obviously substantially reduced capital requirements on securitisation positions, which will make the product economically beneficial to invest in, particularly for banks but also for insurance companies.
In other words I do believe that STS is the best thing that has happened for the EU securitisation market in a long, long time.
I’m therefore very happy to see that this year the market has come to life, with a flow of STS deals.
But when I started writing this, I also thought: ‘What does it mean to be successful’?
When the European Commission published an impact assessment, back in September 2015, examining what a successful introduction of STS regulation would look like, it suggested this STS regulation should increase issuances by approximately €100bn to €150bn a year. Looking back at 2015 data, there was approximately €40bn of issuance equivalent to STS, so that means if there was €150bn of STS issuance a year, this objective would be achieved.
But regardless of the potential size of the STS market, I believe the introduction of STS has already proved its value in Europe. Next to the points that I just raised, I believe that STS has bridged the gap to other segments in the securitisation markets, including balance sheet synthetics and the discussions around NPL securitisation.
Only two or three years ago it was impossible to discuss these products within the regulatory community and certainly not the introduction of potential beneficial regulation to improve the functioning of these segments. As some of you probably are aware, the EBA is working on a number of projects in this area and we will be publishing a few reports around these topics.
Obviously not everything is perfect with STS. It’s very unfortunate that the Commission did not manage to finalise the technical standards by December 2018, and this has created an additional layer of unnecessary uncertainty. I do believe that the intentions of the Commission are good and you could definitely see from the letter that they sent to ESMA on the disclosure templates back in December 2018 that there is a willingness to get things right at the political level.
I’m therefore confident that within the next couple of months this uncertainty will be cleared. I also understand that there are many open questions around scope of publication of the regulation, and the due-diligence requirements for investors. I can assure that the ESAs, and the ESAs are ESMA, EBA and EOBA, are currently collecting information of these fundamental questions and discussing them.
The last point that I want to raise is around the high levels of disclosures via ESMA’s loan-by-loan templates, the transparency requirements via the securitisation repositories and the due diligence requirements for investors. I understand when originators and investors complain about operational burdens and cost involved in order to comply and that this will slow down the revival of the securitisation market.
However I do see things differently here. I believe that these unprecedented levels of disclosures and transparency might create a wobble in the market in the short term. But in the mid and long run, these requirements will put the securitisation product in a pole position compared to other products. Let me explain that.
First of all, the policy making community and all the regulation is moving much more to evidence-based rule making, and all this data.
Second, the data collection will also help investors to do more risk-based analysis. For example, bank investors will be able to create internal models, calculate tranche maturity based on this data, and use SEC-IRBA approaches purely based on external proxy data.
Last but not least, I also believe that the transparency will help the securitisation product and the infrastructure around it to incorporate new developments we’re seeing, such as with the new benchmark rates, and the use of blockchain. I also believe that it’s possible that securitisation could lead the development and set a standard for green loans and green assets going forward. On a final note, I do believe that the securitisation as a whole should play a larger role in the financial system than it currently does. It should not only be used as a funding tool for banks, but also as a tool to help banks with the transfer of NPL portfolios and with their capital and risk management.
It’ therefore important that over the next couple of years we continue the already healthy dialogue between regulators, policy-makers and industry and build further on the positive base that STS has created.