Rafael Alarcón Abeti, prudential supervision adviser at Leaseurope, investigates European policymakers’ plans to revive high quality securitisation markets.

Leaseurope is working with European policymakers and leading financial services industry representatives to establish a fair, balanced and attractive securitisation regulatory framework that allows lessors sufficient access to this important financing tool.
Rafael Alarcón Abeti, Prudential Supervision Adviser at Leaseurope, speaks to Leasing Life about the forthcoming securitisation regulatory framework which is key to increase leasing providers’ access to finance.

The benefits of securitisation for leasing providers

Securitisation is an important channel for diversifying funding sources. It is also a cheap and independent source of funding, particularly relevant for independent and captive firms. Securitisation contributes to the reduction of risk weighted assets and provides capital relief enabling the release of resources for further lending. As lessors are usually involved with large granular portfolios of high quality assets, investors are very attracted to securitisation including this type of collateral. However, in spite of the numerous benefits of securitisation, for both originators and investors, securitisation volumes in Europe still remain low compared to the US.

Therefore, there is vast potential for more leasing companies to benefit from this source of funding. Today, market and regulatory constraints such as high set-up costs, data requirements, complex documentation and lack of investor demand, remain strong barriers. This is why we support the European regulators efforts to revive the European securitisation markets.

The barriers to the use of securitisation by leasing providers

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Securitisation is already a well-established funding tool in the leasing industry. We have recently observed a number of equipment and car leasing Asset-Backed Securities (ABS) deals completed across various European jurisdictions. Asset-Backed Commercial Paper (ABCP) conduits are also a meaningful source of funding for SMEs, equipment and auto leases. Firms in the European leasing and automotive rental markets are already making successful use of securitisation, although only a small proportion of the total market volumes are currently securitised. This is because lessors still find barriers to the use of securitisation.

In our opinion, lessors face three main issues in using securitisation: limited awareness and consideration of leasing securitisation options amongst investors; high issuance costs, particularly for smaller lessors, in part due to a lack of standardisation; and existing regulatory barriers, including regulatory capital charges and European Central Bank rules restricting the use of securities comprising receivables with residual value.

Despite these barriers, there is a strong view in the market that use of securitisation will increase. We have evidence that a growing number of asset finance providers are using securitisation for the first time since the financial crisis.

Addressing barriers to securitisation

To build a wider investor market for securitisation, further work is needed including standardisation of loan agreements and securitisation procedures, and greater sharing of data on loan performance across the market. This work is difficult for any association or business to lead because it involves bringing together competing businesses to share data and practices. The European Commission’s support is needed to create forums for cross-industry cooperation in parallel to regulatory initiatives.

Views on the European Commission proposals to revive the European securitisation market

The regulatory treatment of securitisation is currently under review and Leaseurope are following these developments very closely, as securitisation is a key alternative source of financing for leasing providers. Securitisation is seen by both international and European regulators as an alternative funding channel to the benefit of the real economy and a valuable tool for risk sharing in the financial system.

Since the beginning of the financial crisis, European securitisation markets have remained low. To tackle this problem several institutions, such as the European Commission, the European Central Bank, the Bank of England, the Basel Committee on Banking Supervision, the European Banking Authority, etc., consulted the industry to highlight the key factors limiting a sustainable recovery in securitisation markets. They include: the stigma still attached to this asset class, macroeconomic conditions (e.g. limited growth prospects), the availability of cheaper refinancing sources and regulatory uncertainties.

The extent to which securitisation is used varies significantly among Leaseurope’s members, largely due to the diminishing number of investors. This is why we support the EU’s commitment to stimulate securitisation as part of its Capital Markets Union Action Plan.
In comparison to the US, the volume of EU investors is very low. This fact underscores the need for a more ambitious approach to the proposed new framework. For instance, the European Commission’s proposals do not address the barriers to entry for new investors.

It is critical that investor obligations are kept to an absolute minimum so as not to discourage them. In addition, the capital requirements for banks and insurers investing in securitisation are very high compared to other similar type of financial instruments.

Although we strongly support the European Commission’s efforts to promote securitisation in Europe, we consider the draft regulations, if taken forward without revision, could have the unfortunate effect of making it more difficult for many lessors to use securitisation. This would be damaging for the prospects of sustainable economic growth in Europe. For that reason, we are joining efforts with other financial services industry representatives to work with regulators and politicians in order to deal with the missing elements in the European Commission’s proposals to revive high quality securitisation – the so-called simple, transparent and standardised (STS) securisitisations. It is important to highlight that without those key missing elements, the otherwise positive project is at risk of failing.

The ability of lessors to support job creation and sustainable growth relies on their ability to raise sufficient capital for lending at the lowest possible cost. For a growing number of providers, including bank-owned, independent firms and captives, this relies on their ability to use securitisation. It is crucial that we get it right!