Insurers can support risk reduction at banks

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Due to the new capital requirements, European banks are under pressure to manage their balance sheets and are therefore interested in securitisation opportunities, say specialists from Arch Underwriters Europe. The insurance sector may be of help in this.

Richard SullivanAfter a difficult period, the European market for Asset-Backed Securities (ABS) is slowly recovering. We discuss this with Richard Sullivan, Managing Director of Arch Underwriters Europe, and his colleague Giuliano Giovannetti, President and CEO of Arch Mortgage Insurance dac.

Why are capital relief transactions attractive to European banks?

Sullivan: Due to the new regulations, banks must hold more capital and are therefore optimising their balance sheets. This is happening in an environment in which profits aren’t as strong and it is difficult to raise equity capital. This makes capital relief transactions interesting. Until now, this primarily pertains to synthetic securitisations for assets with a higher risk, such as loans to Corporates and SMEs. However, the largest exposure of the banks is to consumers – via mortgages, credit cards and personal loans, for example. Banks are now starting to look at the possibilities for synthetic securitisations in this area.’

What role could Arch play in this?

Giuliano GiovannettiGiovannetti: ‘Capital relief transactions mainly take place via synthetic securitisation. This means that the loans are not sold to a Special Purpose Entity, but only the risk is transferred. The problem with many synthetic securitisations is that the risk protection sellers does not have a rating and must then provide cash collateral for the counterparty risk. Arch is a strong counterparty with a good credit rating. We can therefore offer financial guarantees without the need to provide cash collateral. The upcoming Basel rule changes will encourage banks to manage their capital as efficiently as possible and insurers such as Arch with their strong capital base can support risk reduction and capital optimisation with the banks.

What is the impact of STS on the European ABS market?

Giovannetti: ‘STS is intended for individual investors who might be less familiar or experienced with the structural and risk features embedded in securitisations. STS provides this group of investors with certain assurances and standardisation as to the structural and credit features in an STS transaction. The STS regulations have been extended to include synthetic securitisations, but this does not apply to RMBS yet. It is still very limited. However, we assume that RMBS will indeed start falling under this framework in the near future, which will give the market an extra boost.’

Do direct lending platforms form a serious threat to the banks?

Sullivan: ‘That is difficult to say. To date in Europe we have concentrated on traditional banks and lenders, because direct lending platforms do not have much of a track record yet. Therefore, it is difficult for us to evaluate the quality of the underwriting, the servicing and the credit processes in these types of institutions.

What are the consequences of the Brexit for the ABS market?

Sullivan: ‘The Brexit creates uncertainty and investors don’t like uncertainty. Right now, it is difficult for issuers to plan their securitisation strategy, because so much is still unclear. Will UK financial institutions lose their financial passport for doing business in the European Union? That would certainly have a negative impact on the ABS market. Fortunately Arch Mortgage Insurance dac is an Irish entity and is less affected by Brexit.’

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