BBVA gets capital relief through synthetic securitisation

BBVA saved €443 million ($536 million) in risk-weighted assets through a synthetic securitisation of Spanish loans agreed with the European Investment Bank in the first quarter.

The deal, struck on March 15, saw the EIB and European Investment Fund (EIF) grant BBVA a €98 million guarantee on the mezzanine tranche of a €1.95 billion portfolio of loans to Spanish small and medium-sized enterprises.

The RWA savings, announced in the bank’s quarterly earnings report, accounted for 13% of a total quarter-on-quarter RWA reduction of €3.3 billion. Favourable foreign exchange movements made up the majority of the remaining savings.

The synthetic securitisation was the second signed between BBVA and the EIB. The first was completed in June 2017, freeing up the balance sheet at the lender to provide €640 million of loans to the Spanish market. The new deal will enable a further €600 million to be loaned out.

What is it?

The EIB-EIF synthetic securitisations are a central plank of the ‘‘Investment Plan for Europe’, initiated to stimulate lending across the single market. The entities were supported by the European Fund for Strategic Investments, a unit set up by the European Commission to bridge investment gaps within member states. The fund provides first loss guarantees, helping the EIB and EIF extend credit to riskier projects.

The securitisations are synthetic as the loan portfolio remains on BBVA’s balance sheet, though the default risk is transferred to the EIB and EIF. This credit risk mitigation allows the bank to strip the associated RWAs out from its total.

Why it matters

BBVA is somewhat of a pioneer when it comes to joint ventures with European authorities. Not only was it a partner in the first EIB-EIF securitisation, in November 2017 it collaborated with the EIB on the first credit line dedicated to help Spanish companies’ digitisation efforts.

For BBVA, deals like this are a win-win. The bank gets to grow its loan pool to a profitable consumer segment without having to swallow higher credit RWAs. This will help it grow in the Spanish market, which already accounts for more than 25% of its profits.

Get in touch

Are other banks benefiting from similar risk-sharing deals with European institutions, and is there moral hazard risk associated with allowing lenders to extend credit to risky prospects knowing that someone else will swallow the losses? Let us know your thoughts by emailing [email protected] or tweeting to @LouieWoodall or @RiskQuantum.  

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