Illiquid assets

GLOBAL INVESTOR 1.15 — 59
In the aftermath of the financial crisis, the European securitization
market collapsed. New issuance in European securitization decreased
by more than 75% compared to volumes in 2008 and has
not recovered since then. Primary market activity in 2013 was below
EUR 200 billion, corresponding to only 14% of US issuance over
the same time period (see Figure 1). The lack of a functioning securitization
market is a major disadvantage for European banks, the
economy and investors. Regulatory-forced deleveraging and its negative
impact on lending and economic growth could have been better
mitigated, in our view.
For the European Central Bank (ECB) to be successful in fostering
economic growth, the current pool of assets for Quantitative Easing
(QE) might prove to be too narrow, so that the issuance of securitized
investment products based on high-quality assets – so-called Qualifying
Securitization (QS) – needs to pick up in order to broaden the
ECB’s investment base. As the ECB is pressuring interest rates and
yields into negative territory, banks are in need of margin expansion.
If structured correctly, this can be achieved by QS and align the banks’
need to earn profits with the ECB’s need for economic growth and
the investors’ need for attractive yield opportunities.
To make the securitization market grow in Europe, it must become
economically attractive for banks. So far, the maths have not quite
worked out, mainly due to regulatory rules with respect to securitization
that result in a lack of “capital relief” for the banks (see box on the
risk capital treatment of different loans and securitizations on p. 61).
Given their need to remain exposed to the part of the securitized assets
with the highest risk, to which a risk weight of 1,250% is applied, the
transaction simply lacks economic appeal for the banks.
ECB as an asset-backed securities buyer
In 2014, the ECB released details of its asset-backed securities (ABS)
purchase program, which was followed by the release of a legal act
enabling implementation of the purchase program with actual purchases
having started. The ECB has appointed four executing asset
managers for the purchase program. The asset managers will conduct
the purchases on behalf of the Eurosystem and undertake price checks
and due diligence prior to approving the transactions. The program
will involve the purchase of senior tranches and guaranteed mezzanine
tranches of loans originated in the euro area. Greek and Cypriot ABS
will also be included in the purchase, albeit with tighter provisions.
The combined size of the ABS purchase program and covered bond
purchase program will reach EUR 1 trillion.
Several other measures have also been taken in the meantime
to facilitate the development of the securitization market in Europe.
Among them, we would highlight the changes to Solvency II >
Turning an illiquid asset into an investment opportunity takes time
The ECB is in the middle of a multiyear process to regain investors’
and market trust, as well as to foster economic growth. In our view,
the basis for regaining investor trust – including the ECB as an investor
– was provided by the comprehensive asset quality review (AQR)
and the stress test carried out by the ECB and the European Banking
Authority (EBA).
In October 2014, following a yearlong analysis of over a million
pieces of data, the ECB and EBA published the much-awaited results
of the AQR and stress test. The AQR exercise covered 130 banks
within the Eurozone’s 18 countries, with total assets of EUR 22.0
trillion accounting for around 82% of total banking assets under the
European Single Supervisory Mechanism (SSM). The EBA stress
tests covered 123 banks across 22 of the 28 EU countries, including
banks from the UK and the Nordic region. Overall, 25 of the 130 banks
failed, with an identified capital shortfall of EUR 24.6 billion. More
specifically, 13 banks were identified to face capital shortfalls totaling
EUR 9.5 billion.
We believe that the ECB/EBA announcement struck the right balance
between being too harsh and being too lenient, notably highlighting
areas of vulnerability for some of the examined banks. Despite not
forcing them to take immediate action, the ECB made it very clear that
the adjustments would become part of its ongoing supervision of capital
requirements as it continues to forge ahead with the agenda
of improving the quality of European banks’ balance sheets. More
importantly, we believe that the process toward a European Banking
Union has significantly contributed to increased disclosure and transparency,
which is building the basis for a greater investor attraction
toward banking assets.
01_Primary market activity of
European and US asset-backed securities
New issuance of asset-backed securities (ABS) remains subdued in
Europe compared to the US. The European market is, however, forecast
to pick up during the course of the year following the launch of the
ECB’s purchase program. Source: AFME, Credit Suisse
in EUR bn
2,500
2,000
1,500
1,000
500
0
2006 2007 2008 2009 2010 2011 2012 2013 2014
Total European ABS placed Total US ABS placed
European ABS placed in % of US ABS placed (rhs)
100%
80%
60%
40%
20%
0%