Regulation of the securitisation market is welcome
The European Commission Regulation is designed to regulate the controversial system of securitisation. Put simply, securitisation enables banks to pool similar loans and purchase credit protection on that pool from an institutional investor. As far as we are concerned, regulation of this market that positively distinguishes high quality securitisations, is very welcome. When the economic crisis erupted in 2008, it became clear that - in the absence of adequate supervision and regulation - in the US this technique had resulted in unhealthy transaction structures in which the interests of originators were not aligned with those of investors. This gave securitisation as a technique a bad name, despite that many securitisation transactions were and are healthy and work well for lenders and investors alike.
Commission should also look at synthetic securitisation
In its proposal, the European Commission strives for Simple, Transparent and Standardised (STS) securitisation, with the focus on the true sale market. However, synthetic securitisation is not part of the proposal. In ‘traditional’ true sale securitisation, the bank sells its loans to an external entity. In synthetic securitisation, banks retain the loans on their balance sheet and, where transactions set up by PGGM for PFZW are concerned, the banks retain at least 20% ‘skin in the game’. Moreover, synthetic securitisations are better suited to loans which lend the real economy a helping hand, including SME loans.
As one of only a handful of players in the market, PGGM has become an expert at this form of synthetic securitisation and is now one of the biggest and most experienced players in the global market. As such we would like to see the scope of the European Regulation to be broadened to include this form of securitisation, and thereby creating a seal of high quality securitisation in the same way as for true sales. The high quality seal is important because it translates into a lower capital charge for banks, which retain part of the securitisation on their balance sheets.
We are pleased to see that the European Banking Authority (EBA) is working on a study of the relevant STS criteria in order to regulate synthetic securitisations and introduce supervision of them. We hope that this will soon convince regulators in Brussels to broaden the scope of the Regulation.
Our position paper
describes in greater depth our stance on synthetic securitisations. We shed light on why we invest in them, what our investment philosophy is and how, as a professional party, we mitigate the risks inherent in working with securitisations.