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‘Basel IV will give a boost to the CRT market’

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Original interview was conducted in Dutch and translated afterwards

‘As a result of the new regulations, banks must meet stricter capital requirements, while the underlying risk does not change. In other words, they must hold more capital for the same assets,’ says Thomas Zelders, Structurer at Rabobank. According to him, this may make it interesting to unlock capital via capital relief transactions (CRT). However, the regulations will only fully enter into force in 2027.

The European market for securitisations has been recovering somewhat lately. Why are the Dutch banks still lagging?

Thomas Zelders | IIR‘The slight growth is mainly driven by an increase of issue volumes in the United Kingdom. In countries such as the Netherlands, however, you can see a shift from the use of securitisation as a funding instrument to covered bonds, mainly because of the lower spreads. Among other things, this has to do with a more favourable treatment of covered bonds compared to securitisations regarding liquidity and capital. New regulations such as STS could help to bridge the gap between those spreads.’

‘In addition, I think there is a lot of potential in using securitisation for balance sheet optimisation, the so-called capital relief transactions. Especially against the backdrop of Basel IV, which requires banks to hold significantly more capital for their loan portfolios than their own models deem necessary, there are opportunities to transfer a part of these risks in an economic way so that capital can be unlocked. This market has been steadily growing for several years and the number of investors is increasing. Until now, banks have primarily issued CRTs on corporate and SME loans. We for example rarely see deals backed by mortgages at the moment, since they require little capital to be held due to the low risk. However, Basel IV will change this, so opportunities may arise to make smart use of this and transfer risks on mortgages to interested investors at an attractive price.’

Do you expect more synthetic securitisations in the future?

‘As I said, the CRT market has been growing steadily for a number of years and that market consists mainly of synthetic securitisations. In 2017, an estimated 30 CRT transactions were performed in Europe with a total volume of almost €95 billion. Compared with the size of the total ABS market, that is significant. More and more banks consider it an interesting addition to their balance sheet management tools and we find that as soon as a bank has done the work for an inaugural transaction, multiple transactions often follow. Basel IV will add further impetus to this. The main question is when this is going to happen, as Basel IV is slowly implemented in phases and will not fully enter into force until 2027. On the other hand, the banks’ annual figures are already showing the expected impact on their risk weighted assets.’

‘A possible side effect of Basel IV is that issuing parties will request ratings for CRTs, as is currently primarily the case in the United Kingdom. The issuer typically retains a part of the risks, for example, the senior tranche. To avoid having to hold too much capital for this purpose, a rating will soon be required. That is interesting for rating agencies, which are generally faced with less reliance on ratings in regulation. Another development is the introduction of new accounting standards, IFRS 9, at the beginning of this year. In the event of a deterioration in the credit quality of a loan, an arrangement must now be made in the amount of the expected loss for the entire duration of the loan. Under certain conditions, you could unlock that arrangement with a CRT.’

Will STS regulations be able to further relaunch the ABS market?

‘I think it is important that there is more clarity now about the new securitisation framework in its entirety, including STS. That is a major step forward for the European ABS market. Whether this will actually provide a boost to the target of €150 billion, remains to be seen. This will depend on the further elaboration in the so-called Regulatory Technical Standards and the treatment of STS securitisations under Solvency II. The latter is important to make investments in securitisations interesting again for insurers and essential for the success of the STS regulations.’

Should investors be worried about the consequences of the Brexit?

‘Ultimately, I think that the impact on issue volumes will be limited. A hard Brexit will, of course, have a negative impact on the capital markets. However, I do not believe that the ABS market will be hit harder than other markets. British ABS represent a significant part of the total European market. If the British economy enters a recession, unemployment will rise, and housing prices will fall, that and that will have an effect on the collateral of the British securitisations.’

Securitisation Event | IIR

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