Chain reaction: Can the need for SME finance set Europe’s securitization market free?
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Chain reaction: Can the need for SME finance set Europe’s securitization market free?

Europe’s leaders are desperate to kick-start lending to the small and medium-sized businesses that are crucial to the continent’s economic recovery and see asset-backed securities as the key. But the entire sector is constrained by post-financial crisis rules. In an era that will be remembered for the unintended consequences of bank regulation, will the need for SME finance finally unleash Europe’s securitization markets?

In central bank-speak, it was about as punchy a statement as you’re ever likely to hear.

Last month, in a speech in Luxembourg, European Central Bank board member Yves Mersch blew the doors open on the debate raging between the ECB and regulators pointing to the obvious impediment to the revival of securitization in Europe.

"The Basle III proposals announced at the end of last year would lead to sharp increases in capital requirements for securitization exposures, particularly for senior high-quality tranches, despite the lack of EU default evidence to support such large changes," Mersch thundered. "All ABS were perceived as too risky due to the US experience in the sub-prime mortgage markets. But this regulation is like calibrating the price of flood insurance on the experience of New Orleans for a city like Madrid."

Mersch did not stop to remind his listeners that Madrid stands 2,000 feet above sea level in a dry region of northern central Spain; rather, he hammered on: "Similarly, if adopted the Solvency II framework would prescribe capital charges for insurers of 80% for ABSs with a double-A-rating and 42% with a triple-A-rating. By contrast, the charges for corporate bonds would be 6% and 5%, respectively.

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