Lagarde calls for a strong securitisation market as an essential component of a historically necessary change to Europe's finance architecture
It is not everyday that a public official calls upon the legacy of the great philosopher Immanuel Kant, but Christine Lagarde did just that today in a short but impactful speech on the historical necessity of the creation of a strong European capital market's union.
A more than notable passage in the speech reads: "A genuine CMU would mean building a sufficiently large securitisation market, allowing banks to transfer some risk to investors, release capital and unlock additional lending." Not only is this very high profile support for a strong securitisation market positive, but it should be noted that it is the only actual concrete element given by the president of the ECB of what is required to create this shift in European finance. (Although, to be fair, there are also suggestions of a real European SEC and fewer players on the infrastructure side of capital markets). The point here is that securitisation is not relegated in the speech to one item on a long laundry list of "nice-to-have" changes that could help along the CMU. It is cited the necessary station on the way to a European capital market.
Another notable element of the ECB's support for securitisation is how Lagarde sees securitisation primarily as a capital management rather than funding tool on the banking side of the ledger.
This support for building a strong securitisation market as a necessary and key political task of the next five years is not a lone effort. It reflects a growing and vocal body of interventions by serious players (such as the French and German ministers of finance) going in the exact same direction. It also reflects many private conversations taking place within policy making circles. After a disappointing lack of meaningful movement on necessary regulatory changes in the last few years, PCS is hoping this will be the starting gun for the finalisation of the reforms that began over a decade ago.
This shows growing and open support for a proposition many (including PCS) have been putting forward for a number of years now: a strong capital market is essential if Europe is to prosper and a strong securitisation market is the only realistic way to achieve one. Since Christine Lagarde commendably gave us permission to use his name: "Securitisation for Europe is a categorical imperative ...at least politically".
We strongly encourage everyone to read the (short) speech.
Green securitisation - ECB adds its voice in support of the "green proceeds" approach
The European Central Bank has just published its opinion on the draft EU Green Bond Standard legislation. Overall an excellent piece, it is notable when it comes to securitisation for its support for a definition of green that encompasses issuance where the proceeds are used by the originator to finance sustainable projects. This can be found in article 3.1.5 of their opinion.
As our readers will recall, a debate arose as to whether the legal EU definition of sustainable securitisation should be limited solely to securitisations of green assets (eg mortgages of green housing or auto loans for electric vehicles) or could also cover - as is the case for all other capital market instruments - bonds whose proceeds are used to finance the transition to a sustainable economy. PCS has argued forcefully that the latter is both logically compelling and far better helps achieve Europe's sustainability goals.
In the context of the draft EU Green Bond Standard legislation, the intervention of the ECB is welcome not only for its support for the broader definition but also at a technical drafting level by suggesting a clarification of the text. As currently drafted, the law may not allow a real "use of proceeds" approach because of the ambiguity of the definition of proceeds for securitisations. The ECB has rightly suggested the ambiguity be lifted to clarify that proceeds of a securitisation in the hands of the originator may be used for green purposes and not, if one followed a technical narrow reading, only the proceeds in the hands of the special purpose vehicle.
Bank of England and ECB respond to the EU Consultation on securitisation
The Bank of England and the ECB released a joint-response to the European Commission Consultation on securitisation. In their response they appear curiously to favour issuer self-certification of quality. This approach, which is not that of the PCS, is quite a bold one in the light of the events that precipitated the financial crisis. It remains to be seen whether it is one that commends itself to policy makers and investors who suffered the consequences of the sales by issuers of purportedly high quality securitisations that then suffered such dramatic losses.
ECB announces details of ABS PP
The details of the ECB's ABS purchase program have been published. Save for some adaptations for Greek and Cypriot ABS, the eligibility criteria remain those of the Eurosystem collateral rules. The program also envisages the purchase of a very substantial portion of any deal - up to 70%. With such a large portion being purchased it seems that the ECB could be the determinant factor of future pricing.
Mario Draghi gives more details on the ABSPP at European Parliament
In his Monday speech to the Economic and Monetary Affairs Committee of the European Parliament, Mario Draghi gave more details on the ECB’s asset backed securities purchase program (ABSPP). It appears that the ECB will be purchasing senior notes of securitisations that are eligible as collateral under the existing Eurosystem scheme. It is unclear though whether the eligibility criteria will be merely the same as under the existing system or whether, as PCS has advocated, they will be higher thus reflecting the greater risk taken by the ECB as final purchaser. PCS very much sees this program as an opportunity to set new standards for the market as a whole, in line with some of the ideas that have been circulated by various regulatory and policy making bodies concerning “high quality securitisations”.
ECB announces an ABS purchase program – but details to follow
Today, Mario Draghi announced the long-awaited ECB ABS purchase program. The President of the ECB said that the Eurosystem would purchase a broad portfolio of simple and transparent asset-backed securities with underlying assets consisting of claims against the euro area non-financial private sector. The detailed modalities of this purchase program (together with those of a new covered bond purchase program) will be announced on or soon after October 2nd 2014. PCS warmly welcomes this confirmation of the strength and quality of high quality securitisations and the acknowledgement of the importance of this financing channel for the European economy. Much, of course, will depend on the actual size and, more crucially, the terms of the purchase program. In particular, whether it will target only senior tranches and how it will define high quality.
Joint ECB and Bank of England report on securitisation is published
A few hours ago, the Bank of England and ECB released the recently announced report on securitisation entitled: "The case for a better functioning securitisation market in the European Union". PCS is reading the document and will be providing comments as soon as we have digested the contents. The report may be found here.
Senior IMF official supports the ECB/BoE approach to high quality securitisation
In the first sign that, following the ECB/Bank of England paper, the debate over the regulatory treatment of high quality securitisation is obtaining a foothold on the global agenda, Jose Viñals, a senior IMF official, spoke favourably of the approach championed in the joint communication. His comments were made in an interview with Borsen Zeitung and picked up by Reuters. (The Reuters piece may be found here and the original interview in German may be reached through here - but is behind a pay wall).
Joint ECB-Bank of England paper on securitisation is published
Today, the Bank of England and the ECB published the recently announced joint paper on securitisation. The paper supports strongly the value of high quality securitisation. Acknowledging the many macro-economic reasons for the low level of current European issuance, the paper also identifies the need to incorporate in the proposed regulatory schemes a single definition of high quality securitisations and to calibrate the prudential rules based on the actual performance of such securitisations. Reflecting arguments that PCS has been putting forward since its inception, we strongly welcome this short but focused and to the point contribution. What makes this paper all the more timely and important is that it addresses the global regulatory work being done by the Basel Committee and IOSCO. Until now, most of the contributions to the high quality securitisation debate had taken place within Europe and concentrated on European approaches (for example, Solvency II). This paper globalises the issue and puts this European approach squarely on the international regulatory agenda. The paper may be found here.
Another article in the Financial Times addressing the ECB's desire to see securitisation return
In an article today entitled "Draghi seeks to revive reviled loan bundles to boost credit", the Financial Times speaks of the desire expressed by President Draghi to see a return of high quality securitisation. The article may be found here (although it lies behind a pay wall).