Securitisation, in short a technique that pools loans or credit risks and subsequently distributes or shares these among investors with different risk preferences, does not have an immaculate reputation. However, there have been and still are many sound securitisation transactions that do an excellent job for both lenders and investors. As long as correctly used, the financial technique of securitisation can brings benefits to investors and originators of loans. That is the opinion of PGGM, APG and Santander.
In their publication PGGM, APG and Santander point out that securitisations are an attractive addition to an investment portfolio. Securitisation offers investors the possibility to diversify their investments across unique credit risks that banks hold on their balance sheets. In addition, banks can re-use the funding and capital relieved through securitisation for new loans to their clients and the real economy. PGGM, APG and Santander want to highlight that this way securitisations can have a positive effect for society.
For example, Santander provides consumer financing throughout Europe by benefiting from the securitisation of car loans, with APG as one of their investors. With PGGM Santander shares in the credit risk of project finance loans, of which more than 50% are related to renewable energy projects. Valuable results, made possible thanks to this technique!
PGGM, APG and Santander are not ignoring the risks. Rather, the publication highlights the need for sound rules and effective checks for this market. The comparison is made with automobiles:
‘..automobiles, when misused by their drivers, can cause great destruction and death. Society does not argue for the abolition of automobiles in order to avoid such negative effect, but rather promotes driver education and strict traffic rules enforced by police. Similarly, securitisation should not be abolished because of misuse by some industry participants. Rather we should promote and enforce the safe use of securitization as intended by the STS regulation.’
PGGM, APG and Santander provide four examples of securitisations, including the two mentioned above, to highlight what securitisation can do and why banks and investors choose for this technique. You can read more about it in the joint publication.