In the spring, EU finance ministers and heads of government expressly called for adjustments to the EU Securitisation Regulation in order to revive the market. This makes Bernd Loewen, member of the Executive Board of KfW Bankengruppe, confident that an intelligent further development of the regulatory framework can be worked out. But the plan must not be watered down in the course of the legislative process. „We need to achieve a significant breakthrough,“ emphasised Loewen in an interview with Börsen-Zeitung.

A revitalisation of the securitisation market is urgently needed in order to give banks new scope for lending. With synthetic transactions, for example, banks are able to release equity. This is important because banks often do not lack liquidity. Instead, the bottleneck is often equity, explains Loewen. In synthetic securitisations, risk is placed out, not the loans, which remain on the balance sheet. There is no balance sheet contraction. „But by placing the risk, an institution can underwrite more credit volume for a given capitalisation,“ he says.

Loewen is convinced that there is no more suitable instrument for building a bridge between bank-based corporate financing and the capital markets than securitisation, asserting that "nothing is more scalable, more proven, more regulated“. In view of the vast funding required for the economic transformation, and the typical securitisation feature of allowing investors to participate in the risk to their desired extent, securitisation is „the instrument of choice.“

„If institutional investors are convinced of the granularity and quality of the pool, they will be happy to invest in securitisations, especially in uncertain times", says Loewen. These investments reduce cluster risks, and are therefore attractive for institutional investors in terms of risk diversification.

Looking back, Loewen believes that European securitisations were wrongly penalised in the wake of the financial crisis. In his opinion, the „subprime“ issue was exclusively an American one. The default rates of residential property securitisations were between 3% and 15% in the USA, and less than 1% in Europe. Nevertheless, EU regulation consciously overdid the documentation, data disclosure and transparency requirements, as well as capital backing. „The wish is for EU legislators is to stop over-regulating securitisations compared to other financial instruments!“ he says.

He is hopeful that there is, for the first time, a broad consensus between politicians, the government and the finance industry in Germany. However, he notes that there are still some reservations in Germany not only about securitisation, but also about the capital markets as such.

In concrete terms, Loewen points to the following considerations: The capital set aside for securitisation investments was deliberately designed in such a way that the sum of the capital backing for the individual tranches is more than what banks would need for the loan portfolio on a bank balance sheet – even though they are the same loans. Behind this is the concern that investors probably don't know precisely what the loan portfolio consists of. „However, this assumption cannot be empirically proven,“ says Loewen. The low default history in Europe even refutes it. Against this background, capital requirements should be based on risk content in future.

As far as due diligence obligations are concerned, Loewen points out that Simple, Transparent and Standardised (STS) securitisations – whether true sale or synthetic – are verified by two institutions that have been approved by the supervisory authorities, namely SVI and PCS. Investors nevertheless have to show that they have undertaken a very complex due diligence process even for these verified products. This unnecessarily reduces the number of potential investors.

„We now have solid empirical data on which of the required data was actually requested by supervisory authorities or investors,“ Loewen explains. In the case of information that has to be compiled in accordance with regulatory requirements but which no-one uses afterwards, the question arises as to whether this makes sense: Nobody needs this data.

Platforms are one way for smaller institutions to make effective use of securitisation. „If platforms were created for the bundling of loans and securitisations of smaller savings banks and Volksbanks, we could imagine acting as an anchor investor in the initial phase to build confidence,“ said the KfW Executive Board member. Provided, of course, that such a platform had, along with the quality of the loans, a minimum issuance volume. The idea behind this is to send a signal to the market that KfW is prepared to invest in these issues.

KfW has always been a supporter of the securitisation markets. It is no coincidence that KfW has successfully operated the „Promise“ and „Provide“ securitisation platforms. And it remains convinced by securitisation instruments.“ „Of our total portfolio of around 35 billion euros, we invest a relatively stable 20% in securitisation structures, because we value the asset class from a risk/return perspective,“ Loewen says.