Restarting the Securitisation Market - Summary

This session looked at what, within current market conditions and likely forthcoming regulation, might help or hinder the reemergence of the market for asset-backed securities. It also tried to consider creative ideas for change within the market.

Regulatory measures within Basel III and Solvency II proposals for securitisation exposures include: increasing weightings for securitised assets, equalizing weightings for securitised assets between the trading and the banking book, a liquidity coverage and the net stable funding requirement which favours  covered bonds over securitisations, and the need to include special purpose vehicles, where relevant, within large exposures. In addition, retention requirements have been passed, obliging originators to hold a fixed percentage of securitisations they originate with the intention of giving them a greater interest in how these securities are structured and how they perform while outstanding. In some jurisdictions there are written requirements on investor due diligence.

Continuing the summit’s theme of ‘trilemmas,’ the group looked at the inconsistencies among the three competing objectives that need to be resolved simultaneously to get the market going again: the pricing of the underlying assets which is currently too low for cost efficient production of asset- backed securities, investor yield requirements for asset-backed securities, and the current price of other funding sources for these assets.

Lack of liquidity and transparency in these securities may be a partial explanation for investor price demands. To this end, efforts to standardise transactions in order to improve their liquidity were discussed. However, the difficulties in standardising lending practices, legal systems and collection and reporting practices mean that it is very difficult to do this across jurisdictions and asset classes. A return to pass-through securities is an option but the unpredictability of cash flows as a result of changes in prepayment rates has never been much liked by investors. However, it might be possible, in some cases to standardise structures, waterfalls and tranching, which might go some way to improve fungibility and liquidity.

Market measures to improve information and transparency, were also discussed. These include work to improve reporting definitions on loss and delinquency, and the automation of data. Consideration is being given by central banks to requiring automated, consistent and timely reporting data for assets they report so as to encourage the process.

These are important given legislative efforts in Europe to require end investors to do their own analysis and monitoring of transactions and reduce reliance on rating agency ratings. However, this may further discourage third party investors in Europe from investing in securitisations, where they remain overwhelmingly held by banks. In the US only about 10% of asset-backed securities are bought by banks, where in Europe about 2/3 of the securities are bought by banks.