Although there was a trickle of new securitisation deals in Europe at the back end of 2009, the market is a long way short of its buoyant pre-crisis state. Most European banks continued to issue deals throughout 2008 and 2009, but the principal reason was to pledge the assets as collateral to access a repo facility provided by the European Central Bank (ECB).
Having access to the repo facility provided vital liquidity to banks during the most turbulent periods of the financial crisis, but longer term the goal of issuers and arrangers is to restore investor confidence in the product. With that in mind, the ECB has identified transparency as a vital component in getting the securitisation market back on track.
At the end of 2009, it issued a consultation paper proposing to make loan-level information on residential mortgage-backed deals available to all market participants.
In an interview with Credit, José Manuel González-Páramo, a member of the executive board at the ECB, discusses the proposal in detail.
Credit: Can you explain why it is so important to get the securitisation market working again, and why improving transparency is central to that process?
José Manuel González-Páramo: Securitisation markets provide an important source of additional funding for banks. They also allow banks to transfer risk, optimise their balance sheet structures and use capital in a potentially more efficient way. If done correctly, under the right market conditions and in compliance with the regulatory framework, the benefits of securitisation can be passed on to borrowers in the form of lower borrowing costs.
Transparency is essential to restoring the confidence of investors. One of the lessons from the crisis is that investors did not correctly assess the risks of the collateral pools underlying ABS deals and relied too heavily on third-party assessments. Such assessments were, in turn, hampered by the lack of timely and high-quality information. We believe more transparent and timely information on the underlying loans and their performance, in a standardised format, will help both investors and third-party assessment providers in their due diligence. Ultimately, more transparency would help to bring confidence back to the marketplace.
Aren’t investors already demanding extra transparency as a result of the crisis?
Despite a handful of small European ABS deals recently, primary issuance remains constrained. This reflects the continued lack of investor confidence, which confirms the view that the market still needs structural improvement to put it on a solid footing. The Eurosystem has already taken some steps, using its collateral framework to request safer, simpler and more transparent ABS structures, but more may yet be needed. If necessary, we remain ready, together with the main stakeholders, to take action to bring about further improvements.
In what way will the loan-level information you are proposing be different to what is provided by the rating agencies and other bodies?
The proposed disclosure standards have been designed with the idea of making the new information available to all market stakeholders without distinction, whether they are investors, rating agencies or originators. Consistent with the regular surveillance reporting requirements that were imposed by the Eurosystem in February 2009 on eligible ABS, the initiative would facilitate the availability of loan-by-loan data on an ongoing basis.
Are investors equipped to analyse the very high number of loans there might be in an RMBS trust, for example?
Large institutional investors would be prepared, as they already conduct loan-by-loan analysis for those transactions where loan-level data exists. Smaller investment managers may not be so willing to spend the time and resources to analyse the loan data, so may instead resort to third-party service providers. The availability of the data would improve the quality of the monitoring processes conducted by investors and rating agencies by allowing the early identification of developments in the underlying assets. We believe this initiative would improve the information set, which would obviously yield benefits for all market stakeholders.
If the portal is paid for by subscription, do you think all investors will pay for it? If not, does that invalidate its worth?
The initiative envisages a market-based solution for the data handling infrastructure, which will depend on the option chosen from those presented in the consultation.
How expensive do you think it will be for issuers to start providing this information?
Perhaps the question should be: how expensive do you think it will be for issuers that do not report this data? We believe that investors and third-party assessment providers will put penalties on issuers that do not provide loan-by-loan level data on an ongoing basis, as well as any other additional data necessary to understand the ABS transaction. Recently, regulators have also taken steps to raise disclosure and due diligence standards, for which the availability of loan-level data will be key.
Obviously, there will be costs associated with adjusting to the new regime, and clearly effort will be required to produce the data. One important aim in the design phase of the RMBS loan-level template has been to reduce the reporting burden on the originators by eliminating non-essential fields and by standardising the reporting loan-level template across all European ABS markets. To achieve this, we have worked together with rating agencies, investors and originators during the study phase.
Will EU countries’ differing disclosure laws provide any sort of a barrier to your plans?
We do not foresee any legal impediment to the initiative. Obviously, our aim has been to ensure the full compliance of the loan-level reporting template presented in the public consultation with the relevant national laws. In order to do this, a key concern has been to ensure the anonymity of the individual borrowers.