On 5 May, the European Systemic Risk Board (ESRB) published a report on the impact of STS on-balance-sheet securitisation on financial stability in the EU. The analysis indicates that the market is growing, with an increasing number of banks using synthetic STS securitisations to transfer credit risks. The ESRB concludes that the market is currently functioning well and does not pose a threat to financial stability. However, the report also highlights some limitations. One key reason given for the currently low risk is simply the small market size. The ESRB also raises concerns about extending STS to synthetic structures that involve unfunded credit protection.<\/p>\n
The ESRB considers synthetic STS on-balance-sheet securitisations as an effective instrument for diversifying credit risk. Such transactions enhance banks\u2019 resilience of banks and support regulatory capital relief, enabling increased lending to the real economy. The report emphasises:<\/p>\n
Although the ESRB report draws positive conclusions, it also highlights potential risks:<\/p>\n
Firstly, during severe economic downturns, the associated sharp rise in default rates for corporate loans might lead to losses filtering through to the senior tranches – which would once again materialise risks in the banking sector.<\/p>\n
Secondly, the ESRB is critical of the lack of transparency due to the non-mandatory ESMA reporting to a securitisation registry \u2013 which would leave supervisors without an overview on where the risks ultimately lie. The ESRB categorises these risks as non-systemic – but in particular due to the small size of the market segment.<\/p>\n
Thirdly, the ESRB is critical the role of insurers as protection sellers for unfunded structures under STS.<\/p>\n
As TSI, we do not share the above-mentioned restrictions in this form.<\/p>\n
Bottom line, the European market for synthetic securitisations also works for larger volumes and represents a reliable instrument for risk diversification, as the risks are effectively transferred to private investors and thus out of the banking sector.<\/p>\n
A lot is happening in the regulatory environment for securitisations. The ESRB report adds to the ongoing discussion. It should be an argument for the European Commission to lower the regulatory hurdles, so that, in particular, more experience investors enter the market. A balanced regulatory framework promotes trust and growth. The time until the European Commission’s legislative proposals, announced for 17 June, is not long anymore.<\/p>\n