Much like mainstream ABS, synthetic securitisation earned itself a bad name during the crisis because a small number of players abused it, according to Hopkin.
The structures created and deployed during that time were overly complex and ultimately meaningless, but Hopkin argues that better quality synthetics that free up bank balance sheets and make way for more funding are healthy.
"This isn't some esoteric complex alchemy"
“I don’t think the name is particularly helpful actually,” added Hopkin. “It’s really no different from a guarantee and can be useful in all sorts of asset classes where achieving a true sale proves difficult.”
Because many SME loan agreements prohibit any future sale, introducing a synthetic element can give the originator a valuable method of transferring risk in the absence of a true sale.
SMEs are at the heart of Europe’s many economic initiatives, as the continent’s over-reliance on banks limits the funding available to help businesses grow.
Simple, transparent and standardised
Certain high-quality, simple ABS structures have been put forward for preferential treatment by organisations like the European Banking Authority (EBA) and the Basel Committee. This took shape last year in the form of the simple, transparent and standardised (STS) securitisation initiative.
But for the more complex, opaque structures, synthetics included, it hasn’t been such an easy ride. The EBA did not mention synthetics in its first response to the Commission in July 2015, but it did acknowledge their value in a December statement.
The statement voices support for the extension of STS capital requirements on certain senior synthetic tranches of SME portfolios. Both Hopkin and Gandy say that while the move is certainly a step in the right direction, the proposal errs too far on the side of caution.
“If everyone agrees that the goal is increasing the depth of capital markets in Europe, and that synthetics can help with that, why limit use of them to SMEs?” said Gandy. “That makes no sense to me.”
In the same report, the EBA estimated synthetic issuance to have reached €60 billion in 2015. Many such deals are often not made public, making PGGM’s decision to issue a press statement all the more noteworthy.
STS is predominately focused on improving the information investors have access to. “And unlike in the cash market, investor protection isn’t really an issue because the market is mainly made up of a small number of big players writing big tickets,” added Hopkin.
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