According to a recent Financial Times article by Alexander Batchvarov, Head of International Structured Finance at Bank of America Merrill Lynch Global Research, the EU securitization market has been labeled unjustifiably as toxic following the financial crisis. According to Batchvarov, it is often overlooked that securitization is simply a technique used to convert pools of illiquid loans into tradeable bonds and the “oversimplification and bias in public discourse” has resulted in a “guilty by association” verdict for securitization.
Batchvarov points out that securitized loans “were and still are originated mainly by EU regulated banks and in line with prudentially established underwriting standards..." and “the majority of EU securitization bonds publicly placed with institutional investors have [a] level of pool information disclosure exceeding that of any other secured or unsecured bond on EU markets.”
Data gathered years after the financial crisis also prove that the majority of European securitization bonds experienced very low defaults rates and European triple A-rated securitizations saw much lower downgrade ratings transition than triple-A rated European covered bonds, according to the article.
Batchvarov also called attention to the 2014 joint letter of the European Central Bank (“ECB”) and Bank of England (“BoE”), “the first official attempt that emphasized the proper use of the securitization for the benefit of the broader European economy.” This has led to an overdue revision of the EU securitization regulations which is now on the agenda of the European Parliament.
“It is for the benefit of the financing of [small and medium-sized enterprises] and the consumer — the core of the EU economy — that the securitization market must be revived. The sooner, the better.”
To read SFIG’s response to the 2014 ECB and BoE joint letter, please see here.