Securitisation group highlights EUR4trn funding gap

Mon Mar 18, 2013 6:30am EDT

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LONDON, March 18 (IFR) - European securitisations could help solve a looming EUR4trn financing gap that the economy is facing, argues an industry trade body in a white paper which states that the capital markets can plug the funding hole left by deleveraging banks.

It argues that with European banks unwilling or unable to lend to SMEs and consumers the capital markets need to fill traditional bank roles, and that securitisation is the most efficient way to do this.

Prime Collateralised Securities (PCS), which was established by market participants to create a seal of approval on European securitisations, arrived at the EUR4trn figure by combining a Deloitte survey, and data from the European Banking Authority, and Standard & Poor's.

These estimate respectively EUR2trn in bank deleveraging, EUR600bn in sovereign bonds tied up by the Basel III liquidity rules, and EUR1.6trn-EUR1.9trn needed to deliver growth between 2012 and 2016.

The paper from PCS argues that most securitisations have performed well, while acknowledging the destruction caused by US sub-prime RMBS, structured investment vehicles, and CDO squareds.

It identifies four problems with pre-crisis securitisation - the originate-to-distribute business model, embedded leverage, maturity transformation, and lack of transparency.

"Securitisations that did not partake of any of these components performed extremely well and in line with expectations," says the paper.

But it points out that securitisation can take whole loans with idiosyncratic local credit characteristics and turn them into tradeable credit-enhanced bond format which can be held easily by capital markets participants, and conform to recognised international standards.

"This is the type of securitisation that is needed to fund the European economy: a securitisation model that has been tested during the most severe crisis since the war and yet has continued to perform its role as a robust and secure funding channel."

PCS certifies transactions meet certain standards of transparency, simplicity, quality and standardisation without making a credit assessment, but best practice. Eight deals have so far been awarded the PCS label, following its launch in November last year. (Reporting By Owen Sanderson; editing by Anil Mayre, Alex Chambers)

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