Illiquid assets

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regulatory rules for insurance companies, which made the capital
charges less onerous for high-quality securitization. Further, rules on
the Liquidity Coverage Ratio (LCR) for banks have also allowed some
high quality securitization to qualify under certain criteria. However,
there is still considerable debate on whether the existing rules on
securitization still make the capital treatment too onerous for the issuing
banks and this is an area that needs to see some change to
help revive the European securitization market.
Securitization market with significant volume
We believe that the data published by the EBA and ECB on banks’
risk exposures and risk-weighted assets should allow the market to
better understand and quantify the eligible securities. From an issuer’s
point of view, we conclude that there are currently situations where
an unsecuritized portfolio may require less capital than a securitized
portfolio (see adjacent box). As a result, the loan portfolio to be
securitized might contain a higher proportion of assets with a higher
risk weight attached to it. Thus, we believe that securitization may
take place in regard to high-quality small and medium enterprise (SME)
loans due to the higher risk weights applied. This is precisely the
area where the ECB is trying to unlock the funding gridlock.
With securitization accounting far from clear under International
Financial Reporting Standards (IFRS) and a likely piecemeal
approach to capital relief, we have tried to estimate the potential
size of qualifying securitization assets for Europe. Depending on the
range of assets taken into account, we have adjusted the data for
asset encumbrance and estimate that the market could range from
a minimum of EUR 1 trillion (including mainly SME loans) to EUR 2.4
trillion (including lower risk-weighted asset categories such as securitized
or collateralized lending). From the asset breakdown, we
predict that securitization is more likely to reopen bank funding channels
for SMEs and corporate lending as we would expect the capital
relief to transmit into lower sustainable funding costs in these sectors.
We therefore believe that securitization can play a key role in
serving the macroeconomic policy objectives of the ECB to foster
economic growth.
Given the completion of the AQR and the launch of the ABS
purchase program, we believe that these are supportive steps toward
a fully fledged securitization market throughout 2015. In turn, we
continue to believe this will provide a positive backdrop for the
Eurozone by releasing capital pressure from banks’ balance sheets,
reducing the cost of borrowing for SME clients and providing lending
to the economy. In an environment of very low yields, investors
(including the ECB) will gain access to higher-yielding assets, which
we expect to be attractively priced at the beginning to reopen the
securitization market.
Christine Schmid
Head of Global Equity & Credit Research
+41 44 334 56 43
christine.schmid@credit-suisse.com
Carla Antunes da Silva
Head of European Banks
Investment Banking Equity Research
+44 20 7883 0500
carla.antunes-silva@credit-suisse.com
The risk capital treatment
of different forms of
loans and securitizations
In this box we compare the capital requirement for
a securitized portfolio (leaving 5% on the book as
per retention rules) with that of the underlying loan
portfolio. In the analysis, we have assumed that
the bank uses the standardized approach for the
calculation of risk-weighted assets.
A
Capital requirements for typical loan portfolios
We take three types of loan portfolios and apply the
risk weights under the standardized approach. We
take a secured residential mortgage, a commercial
mortgage and an unsecured corporate loan,
and present our capital charge analysis below:
1 RESIDENTIAL MORTGAGE – RISK WEIGHT = 35%
CAPITAL REQUIREMENT = 0.08 × 35 = 2.4%
2 COMMERCIAL MORTGAGE – RISK WEIGHT = 100%
CAPITAL REQUIREMENT = 0.08 × 100 = 8%
3 UNSECURED CORPORATE LOAN – RISK WEIGHT = 150%
CAPITAL REQUIREMENT = 0.08 × 150 = 12%
B
Capital requirement for a typical securitization
For a bank that keeps 5% of the portfolio on its
books, the maximum capital charge would be
as follows:
1 RISK WEIGHT = 5 × 12.5 = 62.5
2 CAPITAL REQUIREMENT = 0.08 × 62.5 = 5%
We can see that a bank does not always gain capital
relief from securitization. For residential mortgages,
for example, the capital requirement is greater for
the securitized asset than for the underlying loan
portfolio. This difference in capital treatment might
encourage securitization of high risk assets, i.e.
on a risk-based measure, a higher risk-weighted
SME asset would generate more capital relief for a
bank than a lower risk-weighted residential mortgage.
Regulators thus have to address the risk weight
applied to securitization of assets more closely
compared to the underlying risk of the assets.