Regulation is hampering bank treasuries from fully leveraging securitisation as part of their liquidity stress buffer, a new survey has found.
The Association for Financial Markets in Europe (AFME) survey examined bank treasuries’ asset allocation drivers in relation to securitisation. The findings support AFME’s call for revising the use of securitisation under the Liquidity Coverage Ratio (LCR). The LCR, AFME said, could play a key role in assisting the restoration of the EU securitisation market, if properly calibrated.
Shaun Baddeley, head of securitisation at AFME, said: “It is clear from the survey that lack of appetite by bank treasury functions for securitisation post implementation of LCR is directly linked to the overly onerous requirements and haircuts applied to the product in LCR and indirectly linked to the impact of overarching securitisation regulation upon supply and demand. It is important we find regulatory solutions that ultimately create the right conditions for the return of a vibrant securitisation market.”
Adam Farkas, CEO of AFME, said: “In recent months, it has become clear that European policymakers recognise the vitally important role that securitisation needs to play in order for Europe to remain competitive and to be economically prosperous. The results of the survey give insight into one facet of the challenges arising from non risk sensitive prudential frameworks. This is just one of a package of reforms needed to foster the return of a healthy securitisation market, which is needed to support the significant funding needs of Europe over the coming years”.
The survey found that reduced appetite for securitisation for High Quality Liquid Assets (HQLA) purposes is predominantly due to regulatory constraints, such as haircut levels, LCR eligibility criteria and limited eligible asset availability.
Respondents suggested the following factors would facilitate future investments in asset backed securities: better treatment of securitisation under the LCR; increased issuance; a better return on regulatory capital; and a larger investor base.
In Q1 2024, €60.7 billion of securitised product was issued in Europe, an increase of 43.8% from Q4 2023 and an increase of 69.2% from Q1 2023. Of the €60.7 billion issued, €33.3 billion was placed, representing 54.9% of the total, compared to 67.3% of issuance in Q4 2023 and 55.4% of issuance in Q1 2023.
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