February 14, 2014 / 1:21 PM / 4 years ago

EC takes securitisation further down rehab path

* European Commission willing to look again at liquidity rules

* Official sector support welcome but not enough

* Regulation still cripples market, say analysts

By Owen Sanderson

LONDON, Feb 14 (IFR) - The European securitisation market is a step closer to rehabilitation after the European Commission said it could potentially allow banks to use more securitisations in their liquidity buffers, the latest sign that the tide is turning for the asset class.

The EC's desire to revive SME lending through securitisation is so strong that it appears willing to cast aside a report it commissioned. When the EBA reviewed liquid assets for the Commission in December, it reported some RMBS were liquid, but put most securitisations in the lowest possible liquidity category.

The Commission, according to a document seen by Reuters, is willing to take into account "possible future increases in the liquidity of a number of securitisation products following further differentiation and standardisation of these products" when it sets the standards for high quality assets in the Liquidity Coverage Ratio (LCR) as it implements the Basel 3 framework.

"AFME has long argued that a broad, rather than a narrow, approach to the calibration of the LCR is the most appropriate for liquidity regulation," said Richard Hopkin, head of the securitisation division at AFME, an industry body.

"Including a wider range of real-economy assets will also help securitisation to play its role in funding Europe's economic recovery."

If included in the LCR, banks could be encouraged to buy RMBS and ABS, since they will then serve a regulatory, as well as economic purpose, and this could be crucial in reviving the market.

The Commission also said in the document that "rules on retention, high quality standardisation and transparency should be consistent in order to avoid regulatory arbitrage across countries and sectors". It said it will work with international standard setters to ensure differentiation of "high" quality securitisation products and to explore a possible preferential regulatory treatment for such products compatible with prudential principles.

If a broader set of securitisations get included in the European version of the LCR, this would answer analyst calls for a shift in the regulatory rhetoric towards securitisation.

"The main problem with the recovery of the SME securitisation market in Europe is the burdensome and inconsistent treatment of securitisation for regulatory capital and liquidity purposes," Bank of America Merrill Lynch analysts wrote in a note this week, before news of the EC paper came out.

Morgan Stanley analysts echoed this view, adding that to encourage investor involvement in the asset class, it was important to ensure that broader regulatory treatment was practical and consistent.


The document from the EC, a letter to the European Parliament and Council of Ministers, echoes the ECB's long-standing campaign to reform securitisation regulation.

Last week, the ECB's Mario Draghi and Yves Mersch both reiterated calls to start reviving plain vanilla securitisation, with Mersch saying: "It is critical that the regulatory treatment of asset-backed securities is based on real data and not the legacy of the US sub-prime disaster. We have had a very different experience with ABS here in Europe: Between mid-2007 and the first quarter of 2013 the default rate on ABS in the EU was only around 1.4%, whereas it was 17.4% in the United States."

Market participants, meanwhile, say the EBA study failed to account for some of the particularities of the ABS market, and gave too much weight to turnover and too little to bid-offer spreads.

The move by the EC will add further weight to some of the other support measures currently being discussed in Europe.

Official sector bodies, including the ECB, the European Investment Bank and the Commission, have been exploring options that do not change the regulatory environment, but simply channel more funds to securitisation in the hope of boosting bank lending to SMEs.

The Commission published a paper called "Increasing lending to the economy: implementing the EIB capital increase and joint Commission-EIB initiatives" last June, which explored earmarking EU structural funds to invest in ABS, using the European Investment Bank as the conduit for the funding.

This would sit alongside existing official support offered by the European Investment Fund, which guarantees securitisation tranches and offers credit enhancement to encourage SME lending.

Already, the EIB is deploying some funding in the securitisation market - alongside the loans which it regularly offers to banks to on-lend to SMEs - and is buying the EUR200m A2A senior tranche of Quadrivio SME 2014, a new securitisation backed by SME loans from three Italian banks, Creval, Carifano and Credito Siciliano. (Reporting By Owen Sanderson, editing by Helene Durand and Julian Baker)

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