What are securitisations?
A securitisation is a large number of receivables bundled together in one package. These could be car loans, loans to small and medium-sized enterprises or trade receivables from the sale of solar modules, for example. Investors take a close look at the package and then invest in the part of the package that is most interesting for them. They are able to acquire a low-risk part (senior tranche) or a high-risk part (mezzanine tranche). In practice, the investor either acquires correspondingly structured securities or provides a guarantee.
Incidentally, a private person can only purchase a securitisation under very strict conditions, meaning that it is generally professional clients, such as funds, that buy them.
Securitisations are among the most transparent and heavily regulated financial market instruments available. Every investor is obliged to scrutinise these packages very carefully. At the same time, the institutions that put these packages together must provide comprehensive information about them.
Why are securitisations important for the transformation?
A securitisation transaction can achieve two goals. Industrial companies that have high amounts of receivables owed by their customers can free up the committed liquidity. Banks with high amounts of loan assets can not only free up the liquidity but also the tied-up capital. In both cases, the respective scope for action is increased considerably.
Increasing the scope for action is important because in the coming years there will be enormous demand for investment in the sustainable and digital transformation. In particular, small and medium-sized enterprises in Europe are largely still financed through bank loans. However, banks will not be able to meet this demand for financing in the medium term through loans alone. It will require additional funds from the capital market. Securitisations are the ideal solution. Particularly for smaller enterprises, they bridge the gap to the capital market and create space on bank balance sheets for additional loans. Banks can act as intermediaries between the enterprises and the capital market. Securitisations allow for smaller loan assets to be bundled in such a way that capital market investors can invest in them, in accordance with their risk appetite.
There has been a lot of discussion about strengthening the securitisation market recently. What needs to be considered in this discussion?
Germany’s Federal Minister of Finance, Christian Lindner, and his French counterpart, Bruno Le Maire, have said they are in favour of further developing capital markets union and, in particular, of implementing measures to revive the securitisation market. In France, Christian Noyer, the former head of the French central bank, led an initiative to put together concrete proposals. The Governing Council of the ECB and the Eurogroup have also published statements proposing different approaches: from making known regulatory adjustments to setting up a pan-European securitisation platform.
The key questions are how can the economic viability and attractiveness of securitisations be restored? What measures are appropriate for making the securitisation process more efficient in Europe? What can be improved on the supply side and what can be improved on the demand side? How can the production line for securitisations be optimised? What’s certain is that there is no single measure that can revitalise securitisations. Rather, adjustments need to be made in a number of areas. However, all those involved will need an open mindset if they are to turn political will into action.
Click this LINK to read the Association of German Banks’ latest position paper on this topic.
