International Financing Review: ABS is a means to an end for price stability goal – MerschInternational Financing Review
11 June 2014
By Anil Mayre and Anna Brunetti
Wednesday marked the first full day of the Global ABS conference in Barcelona, with a keynote speech from the ECB board member Yves Mersch.
Mersch has been among those calling for fairer treatment of ABS versus other sectors, and warned against calibrating regulatory treatment by the US subprime crisis. The default figures show European ABS has been a solid product, and now, finally, the shift in sentiment towards the sector has market participants more bullish than they have been since the crisis. There remains much to do, however.
“There is a growing consensus that an instrument once seen as part of the problem could in fact be part of the solution”, said Mersch.
He said that securitisation was a means to an end of allowing the ECB to achieve its main objective of price stability, enabling liquidity-rich banks or non-banks investors to channel funds to the real economy. The two other targets were financial stability and balance sheet stability/protection.
He sees long-term financial benefits of ABS, wanting firms to be less reliant on bank funding (currently around 80% of the European economy is bank financed), and at the same time banks less constrained to lend.
And as far as balance sheet is concerned, the ECB currently has €307bn of ABS pledged to it (15% of the Eurosystem assets) and if a counterparty defaults the ECB would take ownership of the assets and would then look to liquidate them without a loss. As such it has an interest to make sure ABS is a safe and transparent asset class than can be traded in well-functioning market.
He outlined three areas of focus going forward; regulatory treatment, transparency/standardisation and the treatment of ABS by the credit rating agencies.
There remain issues of preferential treatment for other sectors, such as covered bonds not being subject to the same data requirements as ABS but still enjoying more favourable capital treatment.
With regards to the second point, he said he wholeheartedly supported disclosure for ABS, saying that much had been achieved with loan level, but there was room for improvement in standardisation.
For example, he suggested a standard template for ABS, including standard diagrams to allow non-specialists to make comparisons across products, to which additions could be made as required.
With regards to credit rating agencies, he reiterated the fact that ABS remains constrained by rating criteria, calling for more transparency in how the ratings are arrived at and how they would look without their caps. This could include a building block approach where the agencies give possible ratings where each level of constraint is removed - such as sovereign caps and counterparty risk.
Securitisation ready to serve
The day began with a panel saying the ABS market was ready to serve, but asked whether anyone wanted securitisation to help in the fight for growth.
There is indeed a more positive feel in the market than there has been for a long time. This was summed up by moderator Kevin Ingram, partner at Clifford Chance, saying the “days of the industry thinking it will be killed by regulation were hopefully behind us.”
Bob Paterson of Lloyds Bank, said there was definitely a role for securitisation to play. It will allow issuers outside of the big banks to access other markets, such as auto issuers, challenger banks or specialists like buy-to-let or non-conforming lenders. There was also room for regulatory capital deals, like that carried out by Credit Foncier de France recently (called CFHL-1 20214). Alessandro Tappi of the EIF said that securitisation provided a good technique to allow the redistribution of risk away from the banking market.
ABS still faces higher costs than other sectors, which includes transaction costs (IT systems for data), spreads and capital charges.
And there remain, as Ganesh Rajendra of RBS said, other impediments to the market. The biggest problem for ABS was being orphaned after the crisis. The association with the US subprime and CDO crisis meant that the regulators’ response was comprehensive in clamping down on the sector, forcing it back to a niche asset class. In turn, investors shunned securitisation in Europe. There are signs, however of that impediment being removed - such as thorough the ECB meeting last week.
But, there remains €550bn of legacy placed assets outstanding and around €700bn of retained bonds still live. These have to be worked down before a new market can take off. He also said that attracting more real money investment was important for the development of ABS.
Bob Paterson said removing the stigma of ABS was a way to attract investors. The investor base, he said, also needed to know there was a steady supply of bonds coming and that issuers were going to be programmatic. This, however, relates back to the point about the costs of ABS being inhibitive for some.
The late morning sessions split into four concurrent panels. These were European residential real estate fundamentals, investor perspectives on finding relative value in SME finance, liquidity in terms of key global regulation and financing short-term receivables/warehouse financing.
The same themes continue in the subsequent sessions with outlooks for RMBS, what the market can do to help SME financed and another regulation topic, focusing on regulatory capital for banks and insurers. The last of this batch looks at relative value for CMBS.
Bulking up buffers hits trading
Speakers on the regulatory panels pointed to the fact that with large banks having set aside liquidity buffers that significantly exceed 100% of the required LCR, liquidity in the secondary market has dried up. The European markets risk experiencing an even more severe decline in trading volume than that prompted in the US by parallel rules, John Calabrese from Guggenheim Securities said. “Investment banks there are running the smallest positions they ever had across all fixed income” products, he warned.
By defining a portion of the ABS market as illiquid from a regulatory point of view, policymakers are likely to affect market movement and end up making that segment effectively illiquid, added Richard Johns of the Structured Finance Industry Group.
Another worry expressed by Ian Tyler, from the Treasury advisory services at Deloitte, is that the future Net Stable Funding ratio is being overlooked by many, while it will create more structural hurdles for banks compared with the LCR.
The first hour of the post lunch sessions deal with loan portfolio sales, chasing yield in the auto sector, more regulation through structural reforms for banks and the future of the CLO market.
Then covered bonds vs RMBS, an issuer’s perspective of funding in the auto market, regulation in relation to risk retention and a CLO investor roundtable follow.
More RMBS, regulation (transparency and disclosure) and CLO (this time a manager session) follow, with credit cards replacing the topic of autos from the previous panel.
Rounding off the day is a panel covering the role of securitisation in funding the real economy.