4.2 Debt securitisation and covered bonds
Modalities
214. Securitisation is an instrument for the refinancing of banks and for their portfolio risk
management, which has been widely used in the past, especially in the US, mainly for mortgages and, to a
certain extent for corporate loans. Through securitisation, various types of contractual debt are pooled and
sold to investors. These acquire rights to receive the cash collected from the financial instruments that
underlie the security.
215. In the case of SME loan securitisation, a bank (“the originator”) extends loans to its SME
customers (the “primary market”), bundles them in a pool (the “portfolio”) and sells the portfolio to capital
market investors through the issuance of notes, by a Special Purpose Vehicle (SPV) backed by the loan
portfolio (Asset-Backed Securities, ABS).
These asset-backed notes, rated by agencies, are placed with
capital market investors, but can also be retained, at least in part, by the originator banks (Kraemer-Eis et
al., 2010).
216. Once the assets are transferred by the originator to the SPV, there is normally no recourse to the
originator itself. Through the securitisation process, assets are taken off the balance sheet of the originator.
Thus, with this “originator to distribute” model, the bank becomes a “conduit”, which derives its income
from originating and servicing loans ultimately funded by third parties. According to Martin-Oliver and
Saurina (2007), this model is changing the relationship of banks with customers, which is fading, in favour
of a transaction-based bank whose main proceeds come from the fees they earn originating and packaging
loans.
217. An alternative securitisation model, the “synthetic securitisation”, combines the above described
mechanism with credit derivatives, whereby the loans remain in the balance sheet of the originator,
whereas the credit risk of the loan portfolio is transferred to a SPV, which places credit-linked notes,
classified by risk categories, in the capital market (Kraemer-Eis et al., 2010).
218. Debt securitisation presents some advantages for banks, and, indirectly, for SME lending. First of
all, securitisation reduces the bank’s exposure to credit risk,
which is transferred to the capital market. This
has important implications also in the light of the recent financial reforms (i.e. Basel III), as risky assets are
taken out of the banks’ balance sheets and the capital to risk-weighted asset ratios is improved. In other
terms, securitisation can represent an instrument for risk-reduction and “regulatory capital arbitrage”.
Ultimately, by giving capital relief, securitisation reduces the bank’s total cost of financing.
219. Securitisation allows banks to transform SME loans in their balance sheets into liquidity assets,
which can be used to increase lending itself. In an empirical study of loan securitisation by Spanish banks,
Martin-Oliver and Saurina (2007) show that liquidity needs have been a key driver of securitisation, with
higher probability of using this mechanism for banks with rapid credit growth, less interbank funding and a
higher loan-deposit gap. Kraemer-Eis et al. (2010) note that securitisation can be especially important for
smaller banks, which face lending restrictions due to their size. Transferring risks to the capital market
increases their lending capacity. Furthermore, securitisation of SME loans can be an effective option for
them, as their closer customer relations and better monitoring capabilities give them a competitive edge in
lending to smaller companies.
220. Covered bonds work similarly to securitised debt, as they are debt securities (corporate bonds)
backed by the cash flows from mortgages or loans. In the European Union, the Capital Requirements
Directive (CRD) limits the range of accepted collateral to debts of (highly rated) public entities, residential,
commercial and ship mortgage loans with a maximum loan-to-value ratio of 80% (residential) or 60%
(commercial), and bank debt or mortgage-backed securities (Packer et al., 2007).
221. An important difference with respect to securitisation is that covered bond assets remain on the
issuer’s consolidated balance sheet, except under specific variants of the general model. Thus, they cannot
help to strengthen the issuer’s capital ratio. As the investor does not own the assets, the interest is paid to
them from the issuer's cash flow, as in the case of traditional corporate bonds. If the underlying assets
default, the issuer continues to pay interest to investors. However, in case of default by the issuer that is
unrelated to these underlying assets, the lender can take possession of them. As covered bonds are secured,
they are considered to be less risky than unsecured bank bonds, which implies low-cost funding for the
issuer. At the same time, asset encumbrance implies that they are seen as a complement, rather than as
substitute to securitisation.
222. On the demand side, securitised debt has some desirable risk characteristics for investors. Mainly,
as secured assets, these investment options may present lower risk than other market offers. In addition, as
they have limited correlation with the more traditional asset classes in the financial market, they can
improve the risk return profile of the investors’ portfolio. In itself, the bundling of different assets into the
securitised portfolio is an element for risk diversification. In the case of covered bonds, the fact that they
remain on the balance sheet of the originator may provide investors with more confidence with regard to
the assessment of risks and backup for their claims (Wehinger, 2012). In fact, in case of default, investors
have a double recourse, to the issuer and the cover pool. For this reason, covered bonds benefit from a
more favourable regulatory treatment than securitised debt, and greater liquidity in the market. It should be
noted, however, that in most cases, the market for SME covered bonds is relatively new. Indeed, the use of
SME loans as an asset class in covered bonds is not permitted in the legislation of most countries with an
active covered bond market. In some others, changes in regulation that allow this form are recent (OECD,
2014a)
Trends
223. Securitisation activity increased at high rates before the 2008-09 global financial crisis, even in
countries where it had been little used in the past. At the peak of the market in 2006, issuance of structured
finance securitisation in the United States was almost four times that of Europe, where however a
remarkable growth had started, at least in some national markets, such as Germany, Italy, Spain and the
UK (Kraemer-Eis et al., 2010; Blommestein et al., 2011).
224. However, in the wake of the crisis, securitised instruments came under increasing scrutiny and
criticism. In particular, the US subprime securitisation market was seen as a catalyst for the global credit
crisis (Blommestein et al., 2011). The securitised instruments, which were conceived to hedge risk, have
appeared to have the potential to undermine financial stability, by facilitating the leverage of risk. Lack of
transparency with regard to the underlying risks of securitisation, and poor management of those risks,
have been identified as major drivers of the financial turmoil. Moreover, an important misalignment of
incentives along the securitisation chain has been highlighted, in particular the laxer screening of
borrowers by banks, due to their transferring of these risks to the capital market (Gambacorta and
Marques-Ibanez, 2011).
225. In the aftermath of the crisis, securitisation markets plummeted, reflecting the drop in investors’
confidence and increasing spreads with respect to other investment classes. For instance, in Europe, where
most of the SME securitisation originates from a few countries (i.e. Germany, Italy, Benelux, Portugal and
United Kingdom), the volume of total securitisation grew by 460% over 2001-2008. From the 2008 peak, it
then fell by 42% in 2009, when the market volume dropped from EUR 711 billion to EUR 414 billion. The
market segment for SME securitisation, whose share had increased over 2001-07 from 5% to 15%, continued to grow until 2009, when however it came to a halt, as no placement was made in the public
market (Kraemer-Eis et al., 2010) (Figure 9).
226. In contrast, volumes in the US securitisation markets fell sharply in 2007 and 2008, but have
slowly increased in 2009 and 2010, although around two-thirds of the market was based on mortgagebacked securities by the federal mortgage agencies. At the end of 2010, total securitisation outstanding in
the US market was equivalent to USD 8.2 trillion, four times that of European issuance. Furthermore, in
the first quarter of 2011, more than half of the outstanding European securitisation was estimated to have
been “retained” by the originating banks, compared to less than 10% in 2007, which shows the funding
difficulties faced by European banks in capital markets (Blommestein et al., 2011).
227. In this framework, while some asset classes such as subprime mortgages had been built on
inflated asset prices, the SME debt securitisation market segment, which had performed relatively well, has
suffered by and large from contagion effects, through financial markets and in the public perception
(Kraemer-Eis et al., 2010).
228. The relatively low level of SME securitisation issuance placed in the primary market is also due
to the high required yield that cannot be serviced by the cash flows of the asset pool. In other terms, SME
issuance is regarded as uneconomic by some investors,
who are seeking high yields, particularly in the
light of asset quality considerations and low liquidity of the issuance. Since investors perceive the lack of
liquidity in the market and that the underlying SME loans are riskier than residential mortgages, they
typically expect an additional premium. Thus, for SME securitisation to be considered economically
viable, asset spreads charged on SME loans by the originators would need to increase. Alternatively, the
yield required by investors would need to decrease, which could happen if, for instance, more information
were available to quantify the risk involved in SME issuances (OECD, 2014a).
229. Furthermore, market participants regard the current regulatory environment (i.e. Basel III,
Solvency II) as unfavourable, generating disincentives for originators and investors. The complexity of the regulatory framework affecting securitisation is perceived to create imbalances across market participants,
which face different capital charges, and across jurisdictions. Also, in Europe, the extensive process of
consultation and revision of regulations has led to regulatory uncertainty, further hampering the
development of the market (OECD, 2014a).
230. On the other hand, the market for covered bonds has emerged relatively unscathed from the
crisis. This is also because of a more favourable regulatory treatment than securitisation, especially in
Europe, as a simpler tool than complex originate-to-distribute models, and which may allow channelling
funds to the real economy while ensuring financial stability. However, in many countries, still there exist
statutory limitations that do not permit the use of SME loans as an asset class for covered bonds (OECD,
2014a).
Policies
231. The post-crisis deleveraging in the banking sector has revived the debate about the need for an
efficient – and transparent – securitisation market, which may allow the banking sector to access funds at
relatively low cost, to extend SME lending. In Europe, both the ECB and the EC have indicated the
importance of developing primary and secondary markets for the securitisation of SME loans, in order to
foster SME lending22. In 2012, of the total euro area securitised bond market, whose value amounted to
EUR 1 trillion, only some EUR 140 billion was backed by SME loans, a minor share if compared with the
EUR 1.5 trillion estimated value of bank loans to SMEs (IMF, 2013).
232. The European Commission's 2013 Green Paper on the "Long-Term Financing of the European
Economy"23 puts forward ideas for the re-launching of securitisation markets, including adequate
prudential rules and supervision systems; the development of simple securitisation products, using wellselected, diversified and low-risk underlying assets; the creation of dedicated markets especially for SMEs;
and market-based initiatives, such as labels for high-quality, transparent and standardised securitisations.
233. According to IMF (2013), the following policy measures may help strengthen SME debt
securitisation:
• Addressing the asymmetric treatment of securitised assets vis-a-vis other assets with similar risk
characteristics;
• Introducing government guarantees for SME securitisation, which may offset some of the
informational asymmetry and SME credit risk that typically discourage investors from buying
these securities, especially in the case of investors that can only buy securities with certain
minimum credit ratings;
• Including SME loans in the collateral pool for covered bonds, as at present only mortgages,
municipal, ship and aircraft loans are eligible collateral for covered bond issuance;
• Improving risk evaluation for SME securities by regulating and standardising information
disclosure, which would reduce investors’ uncertainty about the quality of SME securities.
234. Some measures undertaken in Europe in recent years, at both the supra-national and national
level, are in line with these policy priorities. The European Investment Bank (EIB) Group has introduced
measures to re-launch the securitisation market, in order to foster new SME lending. For instance, the
European Investment Fund, which is Europe's leading provider of triple A-rated credit enhancement in
SME securitisations, guarantees certain tranches of notes (mezzanine and senior tranches) issued through a
SME securitisation transaction.
235. In June 2013, the European Council approved a joint proposal by the European Commission and
the European Investment Bank to establish one single SME support instrument with a total worth of EUR
10.4 billion. This will be used for loan guarantee instruments and securitisation instruments with a
maximum leverage ratio of 1:1024.
236. At the country level, securitisation of SME financing has received stimulus from national support
schemes. For instance, in Germany, in 2000, KfW launched the PROMISE (Promotional Mittelstand Loan
Securitisation) platform, open to financial institutions from all over Europe, which provides intermediation
between financial institutions and investors, allowing for a reduction of transaction and market entry costs.
In this model, KfW only acts as an intermediary in the securitisation process, that is, it does not take the
economic risk of the underlying SME reference portfolio and does not replace any of the other involved
parties. According to GBRW (2004), the platform succeeded in raising the profile of the SME asset class in
the ABS markets by developing a recognized brand name and structure.
237. In Spain, the government has supported SME securitisation since 1999, with the FTPYME
Securitisation Scheme, which facilitates transactions and offers guarantees to lower the overall funding
costs for the originator. To qualify for the FTPYME Securitisation Scheme, at least 80% of the pool to be
securitised must comprise SME loans, and the originator must commit to reinvest 80% of the proceeds
obtained from the financing in the SME sector, within the maximum period of one year (EC, 2007a).
238. At the same time, as Wehinger (2012) underlines, policies in this area face a challenging
environment, as the SME securitisation can only work when there is confidence in the banking system.
However, the currently high spreads suggest that confidence is low, partly as a result of sovereign debt
overhang, but also due to a fundamental solvency problem that has not yet been addressed.
5. Crowdfunding
239. Crowdfunding is a technique to raise external finance from a large audience, rather than a small
group of specialised investors (e.g. banks, business angels, venture capitalists), where each individual
provides a small amount of the funding requested.
240. The concept of “crowdfunding” is related to the one of “crowdsourcing”, which refers to the
outsourcing to the “crowd” of specific tasks, such as the development, evaluation or sale of a product, by
way of an open call over the internet (Howe, 2008). Through online platforms, the task, traditionally
performed by contractors or employees, can be undertaken by individuals for free or in exchange for some
specified return, whose value is however generally lower than the one of the contribution made to the firm.
Crowdsourcers may in fact have intrinsic motivations, such as the pleasure of undertaking the task or
participating to a community, as well as extrinsic motivations, related to monetary rewards, career benefits,
learning or dissatisfaction with the current products (Kleeman et al. 2008).