Securitisation has taken a battering in recent years. A complex financing technique, little understood by the public, it was an easy scapegoat as a principal cause of the global financial crisis. For a while after the crisis it seemed as if various supervisory authorities would regulate it to the point of extinction.
Thankfully, that did not happen. But over the past six or seven years (depending on when you think the financial crisis actually hit) rules aimed at stifling the securitisation market have been pumped out on both sides of the Atlantic. We have had rules on bank capital, rating agencies, investors and more. The additional regulations are complex, in some cases contradictory, and affect all aspects of securitisation transactions and the parties involved in such transactions.
Such heavily policed technical rules with real sanctions are a far cry from principles-based self-regulation. During this period, prudent bankers and lawyers specialising in securitisation have generally kept their heads down and rebadged as compliance and regulatory specialists.
However, fashions change and so do regulatory priorities. There will still be plenty who will disagree but evidence is mounting for what many in the industry have known all along: that the basic narrative equating securitisation with the financial crisis was always deeply flawed.
How has this come about? First, it turns out that not all securitisations are (or indeed were) bad. In fact, statistical analysis in an October 2014 paper issued by the European Banking Authority showed that, excluding collateralised loan obligations and so-called subprime transactions, securitisations in Europe significantly outperformed corporate bonds in the decade up to 2010 (ie the period leading up to and just after the global financial crisis).
Secondly, a consensus has formed among national states, politicians and public servants across Europe that the real economy needs to be stimulated. Consequently, banks are being encouraged to lend, especially to small and medium-sized enterprises. Unfortunately the same banks – deluged with regulation – are also being told to lend conservatively. That is where securitisation would have helped in the past, being used by banks as a way of managing their balance sheets – selling loan assets to diversify the investor base and also the risk.
This second point appears to have finally registered and is perhaps tipping the balance in favour of a healthy and properly regulated securitisation market. As part of the wider EU capital markets review, the European Commission recently issued a consultation paper, ‘An EU framework for simple, transparent and standardised securitisation‘, inviting industry comment.
This is unprecedented in the sector, in that it is not just another paper seeking to further restrict the securitisation market, but an open cri de coeur. It comprises 18 questions, all of which have the underlying theme that securitisation is a much-needed tool for helping the financial markets to function and inviting suggestions as to how to fix it. The Bank of England and the European Central Bank have already published a joint response paper which is very supportive of the EU consultation exercise.
Even more encouragingly, there is also a suggestion that the EU as a whole gives serious consideration to simplifying legal issues and structures, including, for example, relating to how assets are sold, and looks to introduce transparency and standardisation across the market. There is even the very serious possibility that standardised, well-structured legally-sound securitisation transactions could attract very favourable capital treatment. Shocking though it may be to the gainsayers, there is a real risk that a well-regulated and beneficial securitisation market could emerge to function side-by-side with the EU capital markets.
I sincerely hope that the industry engages with the Commission in this initiative. There is the very real prospect that this consultation exercise may result in exonerating a much-maligned financing technique, make it simpler to understand and document, and assist banks in the real economy to free up lending lines. The term ‘securitisation’ may even make it back into financial dictionaries and into names of bank teams (instead of ‘asset-backed/ financial solutions’). The only pity is that this exercise was not carried out two years ago, as we might already be in the middle of a brave new world.
Jonathan Walsh is head of the global securitisation group at Baker & McKenzie