BNP Paribas: how to save European securitisation

Author: | Published: 13 Sep 2012
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The first European Prime Collateralised Securities (PCS) labelled securitisation is expected imminently.

The PCS initiative was launched by the Association for Financial Markets in Europe (AFME) and the European Financial Services Round Table in June. It aims to revive the region’s depressed securitisation market by developing a label for high quality securitisations.

With securitisation offering a sure-fire way of increasing lending to the real economy, recession-ridden Europe cannot afford to dismiss the scheme.

BNP Paribas’ global head of securitisation, Fabrice Sussini, spoke with IFLR about his hopes for the initiative and the regulatory fires Europe will need to fight to lift its stagnant securitisation market out of decline.

Why is the PCS project necessary?
The PCS initiative was borne out of a mixture of frustration and bemusement at European policymakers’ response to the global financial crisis.

With no European subprime equivalent, and no obvious wrongdoing having occurred in Europe’s securitisation market, it seemed strange to market participants that the pendulum swung back so heavily in the region. Moreover, that many regulatory measures promoted even by European regulators, excluding some justified proposals, seemed disconnected from market realities. The issues that prompted the crisis were not only primarily localised to the US subprime market but were also far more linked to how credit origination was regulated than to the supposed lack of regulation of securitisation itself. Credit business was much more controlled than in the US.

So it was evidently a bit frustrating to see European regulators and policymakers letting securitisation come to a halt while overlooking the actual performance of the product ,as well as its necessary contribution to the funding of the economy.

Alongside other financial institutions and market participants, BNP Paribas’ involvement in what were the origins of the PCS initiative began in 2009. Discussions were started on the need to revive the product in Europe. It was clear to us that, irrespective of past usage of the product, as liquidity constraints and costly regulatory capital requirements would continue to push banks to deleverage, securitisation (or its principles) would remain one of the few viable mediums through which to channel savings and liquidity back to the real economy and banks’ customers.

The question for this small working group centred on “how to get it started, how to restore the confidence lost, what are the lessons we should factor in and the messages from investors and regulators we should listen to?”

Ultimately, the various initiatives taken at different levels in different countries converged and, under the leadership of AFME and EFR, the work continued and resulted in the PCS initiative. Its purpose is to provide the market with a label, not as a rating or a substitute to the credit analysis investors must keep performing, but as a reference for European best practice in terms of transparency, simplicity and quality of processes. It also recognises comments received from investors and the new regulatory framework that is taking shape.

The target is real economy assets, such as mortgages, auto-loans, equipment loans and leasing, and small to medium-sized enterprise (SME) loans; namely, products that have demonstrated good resilience during the crisis. The label will also help rebuild the trust that was destroyed largely by excesses and also the miscommunication around the role the product plays.

It is hoped it will give investors, regulators, and originators themselves, a better indication of standards for those products that are clearly connected to the economy.

It’s not a one-size-fits-all initiative, however. After all, we’re dealing with different European countries that use different product origination processes. But in each of these countries you have best practices and that is what the PCS is trying to encapsulate.

The PCS organisation, under the supervision of its secretariat headed by Ian Bell, should be completely up and running by the end of September. All the logistics are falling into place and we are in the process of finalising the rulebook and securing a chairman for the PCS board.

From there the PCS Secretariat will monitor the deal pipeline to identify transactions that fit with PCS’ eligibility criteria.

Sensitive products, such as collateralised debt obligations (CDOs), will obviously be excluded. But 90% of today’s securitisations could easily be eligible because they are already compliant with a number of rules.

Expectations are that hopefully one PCS transaction will take place before year-end.

If for the time being PCS is mainly focused on European practice and assets, the secretariat will perhaps recommend to the board to expand the initiative outside Europe.

Has investor risk appetite returned?

There is some volatility in the US market, but risk appetite and liquidity remain with a focus on some products such as collateralised loan obligations (CLO) or commercial mortgage-backed securities (CMBS).

The European market, in contrast, has developed into a very limited playing field. The investor profile changed significantly in Europe post-crisis, with many market participants disappearing. Today’s transactions can gather between 40 and 50 investors - substantially less than pre-crisis days – but more importantly, tickets are much smaller. What’s more, a number of these investors are actually European arms of US institutions.

Given the good performance of the assets, the profile of new transactions - simpler and safer - and the demise of once unquestionable high quality and liquid assets such as certain sovereign bonds, we have seen appetite among some European investors such as insurers, some hedge funds and private equity investors. Nevertheless, interest remains patchy and on the whole, the market remains very fragile and on the mend.

You will have no problem at all selling your AAA-rated tranche, depending on the sovereign it relates to. But selling lower rated tranches is much more challenging than it was in the past.

Policymakers must focus more on what can be done to ensure that there are enough investors, in terms of numbers and volumes, and that these investors are incentivised to buy into the market.

How do you expect Basel III capital requirements to affect the market?
European banks are being asked to hold more and more capital on their balance sheets, which makes both raising capital and ensuring decent yield more difficult. At the same time, through banking as well as insurance regulation, investors are disincentivised to invest in structured products; but not apparently because of the nature of the underlying risks.

We are waiting for the new risk weighting within Basel III. Once this is finalised there may well be elements within it that the market needs to discuss with policymakers. Until then, we can expect the reluctance of many players to remain; too many uncertainties are not good.

Once rules such as CRD IV and Basel III are finalised and enforceable my fear is that there will be a disconnect between the perceived consequences of the regulation - seen by IMF or Basel Committee economists as pretty lenient - and the possible true impact it may have.

The problem, largely, is inconsistency. You have so many different players pushing for the introduction of one rule or another at different times. But from my perspective the main issue relates to the lack of positive and clear measures that would encourage investors to buy securitisation, which would allow the market to fund the economy.

The uncertain regulatory environment in Europe is partly to blame. Investors are sitting on the fence – they simply don’t know if they should invest in the market.

Even where you have clarity around rules, it’s not always very helpful. Solvency II is a very good example here. There are some elements to the regulation overall that are perfectly defined, that would make securitisation a bit more complex and a bit more expensive perhaps but that are ultimately workable.

Nevertheless other aspects haven’t been thought through. Take the penalisation of resecuritisation, for example. It is understandably intended to cover the CDO practices that took place before the crisis and market participants have nothing against that.

However the resecuritisation definition is blurred to the point that it could potentially encompass conduits where you are funding receivables from corporates.

Ultimately the industry is generally not asking for the regulation to be pushed back. It is simply asking that policymakers make sure that there is a proper consideration given to the unintended consequences of some of the proposed rules.

Beyond Solvency II, which could be a total market killer, the mandatory credit rating agency (CRA) rotation proposed in the new CRA3 proposal is also totally unworkable. That’s another example of a well-intended rule, which creates competition among rating agencies, that has morphed into a framework impossible to work with.

That said we can see, in some cases, from the principles behind most regulations proposed that we are moving in the right direction. But we still have a long way to go.

It’s critical to react and keep engaging and discussing with policymakers and regulators. Obviously frustration can push some market players to simply walk away and exit the market, but I don’t think that’s an option. There is too much at stake and if our worst concerns were to come true we would lose a lot of time and credibility in trying to tidy it up again, and at great expensive to the economy. What happens on the investors’ side is much more critical in the European market today than it ever was before; including before the deleveraging and increased disintermediation of financing pushed by the new framework.

In fact, it’s goes beyond securitisation.

Ultimately, we may not win on all the points but we should get there. We are not trying to push back on all regulation but rather to make sure that initial regulatory targets are met without killing the product entirely.

For the full interview, see The 2012 guide to Securitisation & Structured Finance out from September 25 in IFLR magazine’s October issue.

See also