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Capital Markets

Securitization: PCS: Game-changer or extra layer of bureaucracy?

Kitemark launched to revive ABS market; Scheme “paternalistic and patronizing”

The Association for Financial Markets in Europe and the European Financial Services Round Table launched their prime collateralized securities initiative last month. The aim of the PCS scheme, which bestows a certification on asset-backed securities that comply with specified standards of quality, transparency, simplicity and standardization, is to decontaminate the product in the eyes of the international investor base and European regulators.

The hope is that a PCS seal of approval for securities of sufficiently high quality will encourage investors to overcome their longstanding mistrust of securitization. In turn, regulators might be convinced to allow the safest of these products to make up a part of banks’ liquidity buffers.

Certainly, any attempt to encourage greater issuance of ABS – responsibly created ABS, at least – is to be encouraged. "The timing on this was perfect," says Robert Plehn, head of asset-backed solutions at Lloyds in London. Plehn is a member of the PCS working group. "It’s been launched at a time when the politicians are looking to get additional credit into the real economy."

Standard & Poor’s estimates that at least €1.5 trillion in bank funding will be necessary to drive any meaningful economic growth in Europe over the next few years – "an amount that alternative sources of funding can’t supply".

Ian Bell, head of the PCS secretariat
Ian Bell, head of the PCS secretariat

"The reality of the European situation is that a lot of funding is needed for growth," says Ian Bell, head of the PCS secretariat. "Securitization has to be a part of that plan: covered bonds and senior unsecured debt aren’t enough. At the moment, it’s a three-legged stool with one leg missing." Bell has long emphasized that the PCS is an addition to, rather than any replacement for, a rating. "Credit ratings only speak to creditworthiness. A lot of investors want more than a rating; they want to know that they aren’t just funding an investment bank’s arbitrage desk," he says.

But should the industry be creating an additional layer of bureaucracy for issuers to navigate when volumes are still so subdued? "I don’t see the cost as being an issue," says one banker. "The bigger concern is the potential for this to create more process. There’s a risk of adding a bottleneck to issuing and, given that windows for issuance are so narrow, quick executions are more important than ever." However, given that this is essentially a seal of quality rather than a credit rating the process should not be too time consuming. "I can’t see the process adding any more time to the issuance process as the verification process should not take more than one or two days – there’s a well-defined rulebook to consult and so verification should be a fairly straightforward process," says Plehn.

If the PCS achieves its aim of giving comfort to European regulators that high-quality ABS is safe enough to count towards liquidity coverage ratios, it will be a milestone in the ABS market’s return to health. If it just adds cost and time to an already challenging deal process, it will not.

If one lesson is to be learned from the US sub-prime mortgage crisis it is that if you don’t understand a security, don’t buy it. "If investors need someone to look into a product and certify it to them as safe, then they shouldn’t be in this business," says a senior banker. "The asset class is inherently complicated, and if you can’t deal with that level of complexity then it isn’t suitable for you. What this is seeking to do is paternalistic and patronizing."

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