Securitizations of loans to smaller European companies should be stuctured as simple transactions with three tranches, said Sharon Bowles, chair of the European Parliament’s Economic and Monetary Affairs Committee.
European regulators have been talking up securitization as a way to boost lending to small and medium-sized enterprises (SMEs), which are the backbone of the region’s economy and have few alternatives to bank funding.
Loans to small companies are capital-intensive, and Europe’s banks are under pressure to deleverage in order to meet stricter capital requirements. Securitizing these loans would get them off banks’ balance sheets, freeing up capital to make more loans.
Bowles, who was addressed the securitization industry at IMN's Global ABS on Wednesday, said that the idea behind keeping the structure of potential deals simple was to attract more investor interest in the product.
But even with this proposed structuring it is proving difficult to get people to purchase these deals without some backing by the European Investment Bank, said Bowles.
She didn't elaborate, but one reason that has been cited for the lack of interest is that spreads on bonds issued by SME securitizations are much higher than spreads on SME loans. So its not economical for banks to bundle these loans and sell them to investors.
The securitization market, Bowles, still had many issues to address before it returns. One of these issues is investor confidence. “Investors are nervous but many banks are doing a lot to brush up [their] image,” she said.
Bowles also advised the industry to be patient, noting that it has been less than a year since regulators began looking at securitization as a solution, instead of the problem, for areas like SME financing.
Problems that remain in the potential Solvency II regulations and Basel risk weighting could have adjustments that make them “slightly better” for securitization, she said.