Chapter

Chapter 11. Capital Market Development: Financing of Small and Medium-Sized Enterprises in the Euro Area

Author(s):
Petya Koeva Brooks, and Mahmood Pradhan
Published Date:
October 2015
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Author(s)
Ali Al-Eyd, Bergljot Barkbu, S. Pelin Berkmen, John Bluedorn, Andreas (Andy) Jobst and Alexander Tieman 

The corporate sector in Europe is highly dependent on bank financing, which has constrained the recovery of credit supply in the wake of the crisis, particularly to small and medium-sized enterprises (SMEs). Developing alternative funding sources for SMEs would enhance the resilience of the financial system and help ensure lending to viable smaller firms. An expansion of the SME securitization market would move firmly in this direction while drawing upon a large existing pool of assets. It would also improve the transmission of monetary policy and the allocation of capital from surplus to deficit economies. The European securitization market performed relatively well through the crisis, likely reflecting more conservative origination and issuance standards. However, further development of these markets requires greater regulatory differentiation of structured finance, crosscountry harmonization of asset structures, and information disclosure, as well as official sector support as a catalyst to expand the market, including by underwriting riskier tranches.

Background

Euro area nonfinancial corporations (NFCs) are more reliant on banks for financing than are their U.S. counterparts. About a third of euro area NFC liabilities are bank loans (Figure 11.1, panel 1). By contrast, in the United States, bank loans account for only about 7 percent of NFC liabilities; firms are much more reliant on capital markets for their financing. Equities also account for a larger share of firm financing in the United States. Focusing only on debt, the picture is similarly stark, with the euro area, Japan, and Europe more broadly all having about four-fifths of debt finance supplied by banks (Figure 11.1, panel 2).

Figure 11.1Liabilities and Financing of Nonfinancial Corporations and Funding Conditions of SMEs

Sources: Bank of England; Bank of Japan; European Central Bank; and U.S. Federal Reserve.

Note: SME = small and medium-sized enterprises. Total private nonfinancial corporation liabilities were about 2 quadrillion yen in Japan, 34 trillion U.S. dollars in the United States, and 27 trillion euro in the euro area in 2013. Europe is the sum of the euro area and the United Kingdom. Data in right panel are end-2013:Q3, apart from Japan, which is end-2012.

1Monetary financial institution lending to corporations under €1 million, for one to five years. Real rates are calculated using realized Harmonized Index of Consumer Prices (HICP) inflation by country.

2Among those firms that applied within the past six months.

Only the largest euro area NFCs are able to directly access capital markets. And even though concerns about sovereign risk in the euro area have abated significantly, the higher perceived borrower risk due to high levels of private sector debt have contributed to reduced lending to SMEs in vulnerable economies. In addition, real lending rates charged to small loans are higher than those charged for similar loans in core countries (Al-Eyd and Berkmen 2013) and have continued to rise as inflation has fallen, raising debt service burdens over the near term in countries in which firms face the highest funding constraints (Figure 11.1, panels 3 and 4).

SMEs are disproportionately affected by weak credit supply. The European Central Bank’s SAFE survey shows that SMEs applying for loans are experiencing difficulties in obtaining credit from banks (Figure 11.1, panel 6). This is particularly the case in Spain and Italy, despite some recent improvement in approval rates (ECB 2014).1 In these countries, “finding customers” and “access to finance” are among the largest concerns.

Ensuring credit availability to viable SMEs is essential to supporting the recovery in the euro area. In 2012, more than 20 million SMEs in the European Union comprised 99.8 percent of all nonfinancial enterprises, employed 87 million people (67 percent of total employment), and generated 58 percent of total added value (Figure 11.1, panel 5). SMEs account for about 80 percent of employment and 70 percent of value added in Italy, Portugal, and Spain.2 In addition, SME sectors in these economies are dominated by micro-firms with fewer than 10 employees (about 90-95 percent of total firms).3

Rationale for Securitization of SME Loans

Diversification of funding sources would enhance the resilience of the corporate sector. Broader access to finance would limit the exposure of firms to banking sector difficulties and help ensure the flow of credit to viable smaller firms, also reducing the vulnerability of the financial system to shocks. In this regard, a number of markets could be further developed. On the equity side, European venture capital and growth funding in SMEs amounted to about €5 billion in 2013 (which is less than one-half the size of the outstanding stock of actively traded, placed senior tranches of SME securitization transactions) (EVCA 2014).4 On the debt side, minibonds (Italy) and commercial paper markets exist, but are also relatively small. Given the dominance of bank lending, these markets tend to be small or nationally oriented. Starting with bank-intermediated SME securitization would develop the market, which could later facilitate direct asset securitization—i.e., more direct access of SMEs to capital markets (Jobst 2008).

A focus on promoting SME securitization would have several advantages, including the following:

  • Readily drawing upon a large pool of existing bank assets (SME loans) to provide additional funding for SMEs;
  • Boosting bank liquidity and releasing regulatory capital, thus providing incentives to banks to cleanse their balance sheets and lend to viable firms;5
  • Helping SMEs rebalance their financial liabilities toward longer maturities; and
  • Attracting nonbank investors to SMEs, particularly in a low-yield environment.

A more developed SME securitization market could also improve the monetary transmission mechanism through the bank lending channel (Jobst, Goswami, and Long 2009). In the context of banks’ reducing their exposures to SMEs and fragmentation across countries, monetary easing has a limited impact on bank credit to SMEs. With SME securitization, SMEs and banks would be able to draw on more funding sources, with a smaller charge on capital for regulated investors, thereby making monetary easing through interest rates and standard liquidity facilities more effective. A more developed market could also boost the supply of collateral for liquidity provision in a crisis situation.

European securitization markets performed comparatively well during the financial crisis, likely reflecting more conservative origination standards. (See Box 11.1 for an overview.) The cumulative default rate on securitization products was relatively low, at about 2 percent; in contrast, the cumulative default rate for U.S. securitization products was about 18 percent. However, the comparison of U.S. and European securitization markets is not straightforward because the underlying assets for these securities differ in their riskiness (Bank of England and ECB 2014b). About one-third of European securitization transactions are rated “AAA” (which is the mode), and more than half are rated “A” or higher (Figure 11.2, panel 1). SME securitization shows a slightly lower average rating, with the modal rating of A. However, almost one-third of SME securitizations are unrated, possibly reflecting their higher likelihood of being retained (Figure 11.2, panel 2). There is also a greater tendency of retained tranches to be lower rated.

Figure 11.2Distribution of Credit Ratings for Outstanding European Securitization, 2013

Sources: Securities Industry and Financial Markets Association; and IMF staff calculations.

Note: NR = not rated; SME = small and medium-sized enterprises. Figure includes both European Union and non–European countries. The value of total outstanding European securitization was about €1.5 trillion in 2013. Of this, about 46 percent was placed and 54 percent retained. SME securities accounted for 8 percent of total outstanding European securitization in 2013. Of this, 14 percent was placed, while 86 percent were retained.

Box 11.1.Overview of the European Securitization Market

The European securitization market is relatively small and concentrated, making securitized instruments a limited alternative for firm financing. The outstanding stock of transactions is about €1.5 trillion—slightly larger than the U.S. market (US$1.38 trillion) excluding residential mortgage-backed securities (RMBS) issued by the housing agencies Fannie Mae and Freddie Mac (Galizia and Gentili 2014; IMF 2009, 2011) (Figure 11.1.1, left panel 1). The European market is dominated by bank-sponsored RMBS, which amounted to around €820 billion at end-Q2 2014. SME asset-backed securities (ABS) constitute less than one-tenth of the total market (€104 billion), broadly comparable with the share of other securities. Moreover, the euro area securitization market is concentrated, with only a handful of countries accounting for the majority of the market. Together, transactions from Belgium, Germany, Italy, the Netherlands, and Spain accounted for about 84 percent of the securitization market in the euro area at end-Q2 2014 (Figure 11.1.1, right panel 2).

Figure 11.1.1The European Securitization Market

Sources: Association for Financial Markets in Europe; European Central Bank; Royal Bank of Scotland estimates; and IMF staff calculations.

Note: ABS = asset-backed securities; CDO = collateralized debt obligations; CMBS = commercial mortgage-backed securities; RMBS = residential mortgage-backed securities; SME = SME asset-backed securities; WBS/PFI = whole business securities/project finance initiatives. Europe is a geographic designation, including EU member states and non-EU countries (panel 1). Other EA is the sum of other euro area members’ outstanding securitization for which separate data are available. It includes Austria, Finland, France, Greece, Ireland, and Portugal (panel 2). Europe includes EU and non-EU countries (panels 5-6). Data labels in the figure use International Organization for Standardization (ISO) country codes.

The securitization market in Europe has contracted by about one-third since the start of the crisis. New placements peaked in 2008 (Figure 11.1.1, panel 5) but dropped to about one-fourth their earlier volume, hovering around €100 billion for 2013. The bulk of the decline in these markets reflects the approximately €500 billion (or about one-third) fall in the RMBS segment since 2009. In relative terms, however, the collateralized debt obligation and commercial mortgage-backed securities markets experienced larger declines, shrinking by almost half, while the SME market similarly fell by about one-third.

As securitization issuance has fallen, its use for refinancing at the Eurosystem has increased. At the peak, the market was evenly split between retained and placed securitization (Figure 11.1.1, panel 3). However, since then, placed securitization has fallen by about a half, mostly reflecting the amortization of contracts before 2009 that have not been fully offset by new placements (Figure 11.1.1, panel 5). Of new issuances, about two-thirds remain on bank books, while for SME securitizations, nearly 90 percent are retained. These retained securities can often be used as collateral for short-term funding from the Eurosystem (Figure 11.1.1, panel 4). Although the size of the eligible asset pool for Eurosystem collateral has increased, the pool of eligible ABS has actually dropped, likely reflecting the attrition of these (and the high redemption rates over the recent past) rather than a tightening of Eurosystem collateral standards (which have been relaxed for some asset classes in the recent past).

Given the high reliance on bank lending in the euro area, this chapter focuses on developing SME loan securitization—intermediated through banks as opposed to direct asset securitization—as a readily available source of finance and a means to overcome the allocation problem that is reflected in divergent private borrowing costs for similar firms across the euro area.

Impediments to SME Securitization

Several challenges must be addressed to further develop SME securitization in Europe. In particular, structural market factors, including unfavorable economic terms (for example, high cost of issuance), adverse cyclical factors (such as ongoing economic weaknesses), and inefficient and fragmented national insolvency regimes reduce the incentives for issuance. In addition, regulatory factors, including pending regulatory changes that raise the capital intensity of holding less risky asset-backed securities (ABS), weaken the investor base.

Structural Market Factors

The economic cost of issuance is high, and a bank must balance this cost against the potential capital relief from securitization and the cost of alternative sources of funding. Higher issuance costs reflect lower net interest margins (and thus difficulty in pricing attractive yields), a high cost of structuring SME-backed transactions (for instance, legal costs, due diligence, pooling, ratings, and credit enhancements),6 and the lack of a sufficiently large investor base (due to regulatory burdens and stringent internal risk guidelines, for example).

High sunk costs can also be involved in securitizing SME loan portfolios. In particular, setting up information technology systems to handle the granular information and variety of collateral related to SME loan portfolios, and operational constraints, such as a lack of uniform reporting standards and credit scoring, make securitization of SME-related claims more costly than, for example, mortgages. Both the significant heterogeneity of SME portfolios across country loan pools and differences in national insolvency frameworks limit the scope for broader securitization markets on the supply and demand sides alike. Also, insufficient volumes of long-term loans (which complicate the estimation of the cash flow pattern of SME portfolios) continue to hamper faster market growth.

  • Pooling—Certain conditions must be satisfied to ensure a loan’s suitability for pooling, raising the cost of due diligence. Among these conditions, a few are crucial: a clean credit history, sufficient tenor with a predictable cash stream (that is, an amortizing loan rather than a bullet loan), clarity on collateral and its availability, and sufficient sectoral diversification. From a bank’s perspective, achieving a critical mass of loans with such characteristics is more difficult in the SME sector than, for example, in the residential mortgage sector in which there is more uniformity of loans, longer maturity tenors, and regularity of payment streams due to amortization.
  • Securitizing—Once a pool of loans is identified, legal documentation must be drawn up, and ratings must be assigned by a commercial agency. Regarding the latter, SME securitization issuances typically require a compromise on the part of issuers, for example, by providing greater credit enhancement than comparable securitization of other assets. Overall, these costs provide a degree of transparency (or reduce riskiness), but they must be balanced against the size of the pool to ensure an adequate cost ratio. Typically, the larger the pool, the less costly are such considerations, except perhaps for credit enhancements.
  • High yields—Investors require a favorable risk-to-return profile. Such a profile can be achieved through a sufficiently high-yielding asset (relative to risk), an inherently less risky asset (relative to yield), or a combination of these. However, it can be difficult for a bank to ensure a high-yielding asset with adequate differentiation between tranches from a heterogeneous pool of SME loans given that such assets are costly to securitize and command relatively low returns. This situation contrasts, for example, with the scope for high-yielding securitization from credit card payments given their high relative interest rates. As a result, low returns on SME loans make for low-yielding securitized assets.
  • Investor base—More stringent internal risk metrics for institutional investors, reflecting the combination of higher capital charges for securitization transactions and heightened risk aversion, have narrowed the investor base, which is mostly regulated in Europe (banks, reinsurance companies, and pension funds). Other types of investors, typically hedge funds, account for only a small portion of the market.

Regulatory Hurdles

Ongoing reforms tend to set high capital charges on securitization instruments relative to other funding instruments of similar risk.7 Under the proposed regulatory treatment for securitization, senior tranches of transactions compare unfavorably with other funding instruments such as senior unsecured debt or covered bonds. In particular, the proposed revision to the definition of risk-weighted assets for securitization exposures by banks effectively raises the capital intensity of simpler (or less risky) assets to the level of complex (or more risky) assets, rendering differentiation of these instruments based on actual market performance irrelevant.8 Furthermore, the finalized capital charges under the Solvency II Directive for insurers investing in securitization transactions (European Commission 2014b) are higher than those for other assets with comparable risks. Although the capital charge on these assets has recently been lowered,9 it is unlikely to be sufficient to draw institutional investors.10 Under current market conditions, the proposed regulatory capital charges for highly rated structured finance instruments (securitization and covered bonds) on SME-related debt would reduce balance sheet leverage to a point that insurance companies (and to a lesser extent banks) can no longer achieve a sufficient return on equity based on current profitability. (Box 11.2 illustrates how capital charges affect potential returns.)

Preferential treatment of high-quality securitization (HQS) instruments in the forthcoming European liquidity standards would increase investor appetite for these assets. The Basel definition of the liquidity coverage ratio (LCR) mostly excludes securitization instruments from the measure of liquid assets, apart from some limited types of RMBS, but will allow the inclusion of highly-rated covered bonds up to 70 percent of high-quality, liquid assets (HQLA). Failure to broaden the pool of eligible assets to a wider range of securitization structures of sufficient credit quality will reduce investor appetite for such instruments.11 However, the pending LCR under the Capital Requirements Regulation (CRR) is likely to include a wider range of HQS (see Annex 11.2) in the definition of liquid assets.

Recent EU retention rules help ensure that issuers have “skin in the game,” but may also put a burden on investors to fund retained portions once transaction structures for genuine risk transfer replace the current “securitization to repo” issuance. In 2013, more than half of all issuances (and far more than what would be required under the existing skin-in-the-game rule of 5 percent under the Capital Requirements Directive II) were retained by the originators, that is, the current retention rule is nonbinding. Steps are being taken at the EU level to improve access to information to enhance investors’ confidence in the quality of the instrument and the underlying asset portfolio. Under the CRR, the European Banking Authority has drafted Regulatory Technical Standards that specify requirements for due diligence for institutions becoming exposed to a securitization position as well as for originators, sponsors, and lenders to retain an economic interest.

Relative Performance

Simple structures and limited, targeted official support have enhanced the relative performance of European securitization. Unlike some other jurisdictions, most transactions in Europe showed remarkable resilience during the recent crisis.12 This performance might be explained by many features of HQS that have developed as a result of both bank-based issuance and established public sector programs, including traditionally conservative loan origination standards, with high equity participation of the originator; servicing being retained by the originator (servicer continuity) together with issuer due diligence; adequate post-issuance performance monitoring; and treatment of securitization as part of ongoing balance sheet operations (see Annex 11.2).

Box 11.2.Regulatory Hurdles

A simple cost-benefit analysis can illustrate how proposed capital charges under the standardized regulatory approaches affect banks’ and insurance companies’ trade-off between investing in either securitized or non-securitized SME loans. For these investors, which are subject to regulatory standards for capital adequacy, the interaction of their desired return on equity (RoE) and the degree of leverage implied in the economic cost of capital for any given asset return determines whether the proposed capital charges under the relevant regulatory regime (Basel III–Securitization Framework and Solvency II–Capital Charges for Long-Term Investment) are binding.1

At current market prices, insurance companies (and to a lesser extent, banks) have a much greater incentive to hold SME loans rather than invest in highly-rated securitization transactions backed by the same credit risk. The solid curves in Figure 11.2.1 depict feasible combinations of the regulatory capital charge and the RoE for any given market return on an asset. Higher capital charges are associated with lower implied leverage, which decreases the potential RoE for a given asset return and vice-versa (all else equal). The intersection of these curves with the dotted horizontal lines showing the proposed capital charges under the Basel III and Solvency II regimes illustrate that investment in highly-rated senior tranches (“ABS (SME) AAA”) would result in a RoE of less than 13.0 percent for banks and 4.5 percent for insurers. This rate is only slightly above the current benchmark RoE that banks would earn by simply holding the SME loan on their books (with the intersection, or asymptotic convergence, of the blue curve and line occurring to the right of the current RoE).

Figure 11.2.1European Securitization: Market-Implied Regulatory Capital Charge for Banks and Insurance Companies at Current Yields

(As of end-May 2014)
(As of end-May 2014)

Sources: Basel Committee on Banking Supervision; Bloomberg, L.P.; European Insurance and Occupational Pensions Authority; and IMF staff calculations.

Note: CLO = collateralized loan obligation; RoE = return on equity; SME = small and medium-sized enterprises. Current yields for benchmark deals of AAA-rated CLOs and covered bonds as well as average net interest margin of SME lending in the euro area after provisioning (20 percent); return on equity after taxes. For the capital charge of insurers, a maturity tenor of three years was assumed for the CLO to derive the solvency capital requirement (EIOPA 2013); for banks, the calculation of the regulatory capital charge assumes the capital adequacy ratio =10 percent based on given risk weightings according to BCBS (2013). This analysis reflects the standardized approach under the proposed regulatory regimes for banks and insurers. For an assessment of internal model-based approaches in banking, for instance, one would need to apply the so-called ratings-based approach to rated tranches and the supervisory formula approach to unrated tranches retained by originators. For investing banks, unrated tranches would need to be fully deducted from capital unless the application of the supervisory formula approach is granted by the national supervisor.

Moreover, for insurers, the RoE from holding the security is far below the (current) benchmark RoE of 7.5 percent. Note that investing in (or not securitizing) SME loans remains profitable for both banks and insurers, with the intersection (or asymptotic convergence) of the curves and lines with markers occurring to the right of the (current) benchmark RoEs.

These observations highlight that current regulatory incentives are stacked against securitization. In particular the regulatory treatment of nonbanks in the area of capital adequacy impedes the broadening of the potential investor base. The impact of current monetary easing on risk premia (and the current yield/net interest margin) influences these results but is unlikely to affect the overall outcome.

1Sophisticated investors are likely to use approved internal models; however, given the overall consistency between internal model-based estimates and standardized approaches, the results presented provide broad guidance regarding firms’ sensitivity to changes in capital charges.

Moreover, in some countries, such as Germany and Spain, successful platforms for bank-sponsored SME securitization are in operation.

Lessons from Previous SME Support Programs

Most SME securitization transactions in Europe have benefited from public sector—sponsored programs, which have enhanced their relative performance. However, the customized and nationally oriented nature of these programs has limited the potential scope for broadening capital market access for SMEs (see Annexes 11.1, 11.3, and 11.4). The most significant national programs in Europe are the Asset Securitization Funds for SMEs (Fondos de Titulización de Activos para Pymes or FTPYME) in Spain and Kreditanstalt für Wiederaufbau (KfW)’s PROMISE (Program for Mittelstand-loan Securitisation) platform, which provide cost-efficient funding support to bank-originated loans to SMEs. Such support has generally been motivated by the cost implications of recent structural and regulatory changes for banks’ SME lending, such as the shift toward fee-generating business, the greater risk sensitivity of capital standards, and more competitive pricing of SME loans.

In some cases, the European Investment Fund (EIF) has acted as credit guarantor for public sector programs or banks’ own securitization vehicles. These actions help facilitate credit risk transfer and improve the market liquidity of SME securitization transactions by widening the investor base. The EIF typically covers tranches rated in the range of BB to A (mezzanine tranches), for which the secondary market is particularly illiquid.13 Such guarantee schemes are very effective in providing market access to smaller banks with low issuer ratings and mitigating the influence of “sovereign ceilings” in deficit countries, which cap the highest rating issuers can achieve because of the general level of sovereign default risk. During the financial crisis, the EIF also provided “wrappers” for senior tranches issued by banks in stressed economies, making their placement possible with a wider investor base.

Schemes also exist at the European level, but their use has been limited to supporting on-lending rather than SME securitization (Annex 11.3). The SME Guarantee Facility was set up under the EU’s 2007–13 Multiannual Financial Framework (MFF) to improve SMEs’ access to finance, including through co-, counter- and direct guarantees to banks. Although the facility was used in 21 countries, generating €15 billion in lending to more than 275,000 SMEs, there was only one agreement under the securitization window.14 The SME Guarantee Facility was closed at the end of the 2007–13 MFF, but its activities, including a securitization instrument, are expected to be continued under the European Commission’s Competitiveness of Enterprises and Small and Medium-Sized Enterprises (COSME) program for the 2014–20 MFF.

There are also private sector initiatives, such as True Sale International GmbH (TSI). The TSI platform was created in 2004 by a consortium of 13 German commercial banks to promote the German securitization market. It provides issuers of transactions with a cost-efficient, standardized issuance process that complies with national competition law and regulatory requirements. The TSI platform allows participating banks to securitize loans through a specially created limited-liability special purpose vehicle (SPV) owned by three charitable foundations (Jobst 2006).15 In 2010, the TSI created the German securitization certification standard (Deutscher Verbriefungsstandard), which establishes clear rules for transparency, disclosure, lending, and loan processing. The platform is heavily used by consumer loan and lease ABS structures; only two SME securitizations have been completed via the TSI so far.

Recent Efforts

Current initiatives at the European and national levels are steps in the right direction, but are too small or too narrowly focused on bank lending to have a broad impact. These initiatives include the joint European Commission–European Investment Bank SME Initiative and the Banque de France’s approval of securitized credit claims for collateralized refinancing by originating banks. Both proposals envisage greater official support to bank-sponsored SME lending, but fall short of mechanisms to solicit nonbank funding sources and schemes that would allow direct capital market access:

  • Joint EC-EIB Initiative—This initiative aims to kick-start lending to SMEs by blending EU Structural Funds, EU funds, and EIB resources through guarantees and securitization, thereby offering more generous conditions than existing EU initiatives (Annex 11.3). However, the uptake among EU countries has been limited, with only a few countries participating so far, partly because of complex procedures governing the use of Structural Funds as well as funds having already been committed. The option of cross-country pooling of resources and risk, which would significantly leverage resources and reduce the effects of financial fragmentation, is unlikely to be used in the near term, reflecting the limited uptake and, possibly, concerns about adverse selection bias.
  • Banque de France (BdF) proposal—The BdF developed a scheme for the standardization of securitized credit claims by allowing banks to bundle SME loans rated “BBB–” and higher (through a commonly owned SPV [Euro Secured Notes Issuer]) unrated as collateral for refinancing via the central bank or interbank repurchase agreements.16 This scheme draws on the experience of the Eurosystem in instituting greater transparency about collateral assets and their performance over time in “retained” securitization transactions via the ECB’s loan-level data initiative. The first transaction was completed in April 2014. However, current implementation requires detailed supervisory information on loan characteristics, which may limit broader (pan-European) application.

The ECB’s loan-level data initiative will help improve transparency of securitization instruments. The initiative establishes requirements for transparency and standardization as necessary preconditions for ABS, including SME ABS, to be considered eligible as Eurosystem collateral. The detailed information on borrower and loan characteristics can be used by current and potential investors to carry out their own credit analyses, and will help address information asymmetries. The benefits are likely to take some time to materialize and will require steadfast implementation of the standards and data requirements.

Suggested Measures to Facilitate the Development of SME Securitization17

Involvement of the official sector would help promote credit risk transfer. The official sector should support the development of ABS structures that facilitate the transfer of SME lending risks from banks to capital markets and take steps to align the underlying risks of these instruments with regulatory charges. Low bank funding costs have limited the supply of more-expensive transactions that involve credit risk transfer and the inclusion of asset types that are generally more costly to securitize, such as SME loans.18 At the same time, higher regulatory capital charges and cumbersome operational requirements for investment have inhibited demand for SME securitization transactions (relative to other forms of investment). Moreover, risk-adjusted returns of senior tranches of such transactions are currently too low for institutional investors (banks, insurance companies, and pension funds), while the nonbank investor base is limited.

Measures that would facilitate development of SME securitization include the following:19

  • The regulatory regime should appropriately differentiate between high- and low-quality securitization transactions—The proposed revisions to the definition of risk-weighted assets by the Basel Committee and assigned capital charges for long-term investment under the implementation guidance under Solvency II will lead to a significant increase in capital requirements for institutional investors subject to the regulations in senior tranches of securitization transactions. Reducing the capital intensity of structures that qualify as HQS could encourage the supply of transactions that provide genuine risk transfer (rather than being used for funding purposes only).20
    • ° SME securitization—as an asset class—is generally considered HQS in current policy proposals and monetary frameworks, but does not benefit from more favorable regulatory treatment (see Annex 11.1). HQS would place greater focus on structural characteristics that allow for better risk sharing between originators and investors who can assess the impact of changing economic conditions on the performance of securitization transactions.
    • ° Demonstrable compliance with these characteristics should result in regulatory treatment that is commensurate with this proposition in contrast to the currently proposed catch-all regulatory treatment of securitization transactions.
    • ° Greater disclosure of underlying loan quality and performance monitoring would aid compliance efforts. The operational implementation of HQS would be largely informed by central bank repo eligibility with a focus on transactions with simple structures, transparent underlying asset pools, and predictable performance (see Annex 11.2).
  • Demand for SME securitization is also influenced by proposed regulatory standards for liquidity risk—The definition of the LCR mostly excludes securitization instruments from the measure of liquid assets, apart from some limited types of RMBS. Moreover, the pending liquidity coverage ratio under the CRR will include only highly-rated RMBS, but will allow the inclusion of highly-rated covered bonds up to 70 percent of the liquidity buffer.21 Broadening the pool of eligible assets to include HQS in the stock of high-quality liquid assets (HQLAs) will increase investor appetite for a wider range of securitization structures of sufficient credit quality.
  • Capital markets for securitized SME loans could be developed further by revising the investment restrictions for institutional investors (insurance companies and pension funds, for example)—once the supervision and regulatory framework is strengthened—to encourage alternative investments that benefit SME financing, such as venture capital.
  • Structural improvements could further facilitate market development—SME securitization instruments face particular challenges related to the heterogeneity of SME loan portfolios across countries. The complexity of information and different reporting requirements makes it difficult for investors to assess credit risk and creates a home bias.
    • ° National debt enforcement and insolvency frameworks should continue to be strengthened, with a view to cleaning up banks’ balance sheets and boosting the quality, transparency, and accessibility of collateral. This effort would include policy measures that facilitate out-of-court settlements, reduce impediments to efficient debt restructuring, and introduce guidance on tax incentives and resolution procedures in line with international best practices.
    • ° Greater harmonization of SME lending standards, loan reporting requirements (through the Single Supervisory Mechanism), and credit registries across countries would facilitate the establishment of a truly single market.22 Consideration could be given to broadening the coverage of credit registries through a centralized database. The harmonization of reporting requirements would not only enhance cross-border investor demand but create scope for developing securitization instruments that pool SME loans on an EU-wide basis. The single supervisory mechanism can help in this respect.
    • ° Direct capital market access for SMEs should be improved by creating a mutual issuance platform. This platform would allow sufficient aggregation for minibond and structured finance issuance and could build on efforts to achieve greater harmonization of SME funding in line with recent recommendations by the European Commission’s High-Level Expert Group on SME and Infrastructure Financing (European Commission 2013). Also, forms of nonbank-intermediated securitization (such as trade receivables via asset-backed commercial paper [ABCP] facilities) and equity finance should be explored in areas in which structural impediments to asset securitization are too high and cannot be overcome in the near term (European Commission 2014a).
  • Official sector involvement would be essential in areas of SME finance in which information constraints and insufficient economies limit the effectiveness of market-based solutions—Supply-side impediments to a wider range of nonbank SME funding options are often found in the costs associated with higher standardization of both information disclosure and performance reporting. For SME securitization, existing public sector programs could be augmented and potentially supplemented by additional efforts:
    • ° The various euro area institutions could initially act as guarantors or strategic investors in cost-efficient funding structures with genuine risk transfer to market investors, while guarding against long-term distortionary effects by time limiting any risk sharing. For instance, the European Investment Bank (EIB) and EIF could initially provide guarantees to lower tranches of fully marketable transactions, which would reduce the credit risk of strategic asset purchases of senior tranches by the Eurosystem. Such efforts could be combined with the EC-EIB SME initiative to create operational synergies and sufficient critical mass to address the funding needs of SMEs in stressed economies.
    • ° Incorporating a more nuanced treatment of HQS in the Eurosystem collateral framework could benefit SME securitization by providing incentives to issuers to develop transactions irrespective of whether parts of them are retained for ECB repo funding.23

Conclusion

The further development of securitization is an important step toward more integrated capital markets in Europe. Given the lack of diversified funding markets, with only the largest firms able to directly access capital markets, credit supply to the corporate sector is heavily influenced by the lending behavior of banks. Securitization of intermediated credit could help overcome the adverse effects of financial fragmentation, improve the allocation of liquidity, and support cross-border investment within the euro area. Restarting securitization would mitigate structural constraints on credit supply as many banks, especially those in vulnerable economies, continue facing considerable funding needs while unsecured funding remains impaired, especially at longer maturities—even though concerns about sovereign risks in the euro area have dissipated. An expansion of the SME securitization market would move firmly in this direction, while drawing upon a large existing pool of assets and providing a key nonbank funding channel.

However, structural and regulatory conditions are stacked against SME securitization. Unfavorable economic terms and adverse cyclical factors reduce the incentives for issuance. Moreover, pending regulatory changes—Basel III for banks and Solvency II for insurance companies—weaken the investor base by increasing the capital intensity of holding highly-rated securitization transactions and limiting their eligibility for liquidity purposes. Progress toward incubating a larger SME securitization market would require greater regulatory differentiation of HQS, cross-country harmonization of asset structures, and official sector support as a catalyst to greater activity.

Annex 11.1. Public Sector Support for SME Securitization

The most significant SME support programs in Europe are the Asset Securitization Funds for SMEs (Fondos de Titulización de Activos para Pymes or FTPYME) in Spain and Kreditanstalt für Wiederaufbau’s (KfW’s) PROMISE (Program for Mittelstand-loan Securitisation) platform, which provide cost-efficient funding support to bank-originated loans to SMEs. In PROMISE, the issuing bank sells credit protection (supported by third-party guarantees) to create partially funded and leveraged investments in SME exposures (without removing them from its balance sheet). Similarly, in FTPYME, banks receive guarantees that support the off-loading of SME loans. Although both programs have attracted repeat issuers and involve a considerable cost reduction for issuers, they tend to be very customized and focused on larger banks, with limited or no diversification effects across different SME loan portfolios or banks. Similar products (securitization of lease receivables) have been developed in Italy by arrangers and originators to achieve better funding costs. Given the high dependence of SMEs on bank lending, both programs aim to provide capital market access for smaller banks and reduce both the regulatory and economic cost of new lending. By helping financial institutions achieve regulatory capital relief for securitized SME lending, these programs have created more scope for future SME loan origination.

In the United States, SME loan securitization began in 1985 when the Small Business Administration (SBA), a U.S. government agency, launched its loan guarantee program. The SBA does not lend money directly to SMEs but offers government guarantees of up to US$5 million on loans made by commercial lenders to SME borrowers that face challenges obtaining financing. The guarantee covers a portion of an SME loan originated by a local bank, credit union, or specialized lender, ranging from 50 percent to 85 percent, depending on the program, thereby limiting the lender’s risk and exposure. The lender then provides the actual loan to the borrower and securitizes the “SBA-backed loan.” During fiscal year 2012, lending volumes exceeded US$14 billion.

In addition to public guarantees, the Bank of Japan (BoJ) introduced measures to support SME financing and securitization during the late 1990s and early 2000s, also aiming to repair the monetary policy transmission mechanism. Given the importance of SMEs in Japanese economic activity, improving their access to credit was seen to be essential to restoring the monetary policy transmission mechanism. In 1999, the BoJ started accepting eligible ABS as collateral for banks’ maintenance requirements. In 2003, the BoJ introduced a program to purchase ABS and asset-backed commercial paper backed by SME loans.24 The objective was to strengthen the transmission mechanism by circumventing the banking sector, while avoiding market distortions and limiting the risk to the BoJ.25 Accordingly, the BoJ started purchasing ABS with a broad range of underlying assets, including SME loans, receivables, and leases.26 However, other policy measures distorted the healthy development of the SME sector. Various credit support policies helped shelter existing firms from tighter credit conditions and limited the number of bankruptcies but also kept unviable SMEs afloat. The measures comprised public credit guarantees, safety net lending by government-affiliated financial institutions, and temporary relaxation of provisioning requirements for SME loans (Lam and Shin 2012).

Annex 11.2. Defining High-Quality Securitization (HQS)

Three attempts have been made to define HQS within the broad securitization market: (1) the ECB with its collateral eligibility criteria; (2) the European Insurance and Occupational Pensions Authority (EIOPA) with its “Type 1” standard for long-term investment of insurers in securitization transactions; and (3) the Bank of England’s eligibility criteria for repo collateral, which closely (but not fully) matches the eligible asset classes and eligibility requirements of the prime collateralized securities (PCS) standard related to sufficient portfolio diversity, no subordinated exposure of loans, risk retention, information about underwriting criteria, and servicer continuity. Together with residential mortgages and consumer loans, leases, and credit card debt, SME loans are commonly found as reference assets for HQS. Complex structures (for example, resecuritization, synthetic securitization, and single tranche securitization) are unanimously excluded from all lists. Typically, the qualification as HQS should involve additional criteria: (1) restriction to true sale structures (synthetic transactions are excluded); (2) minimum rating threshold (at least “BBB–” [or equivalent] by two credit rating agencies at any time since launch);27 (3) exclusion of nonperforming loans and loans to self-certifying borrowers or credit-impaired borrowers at the time of loan origination; (4) homogeneous underlying portfolio (securitizations of mixed pools are excluded); and (5) loan-by-loan-level data available at launch and on a regular basis.

Based on transparent characteristics, the identification of HQS would help distinguish simple and prudently structured transactions from transactions with more complex, opaque structures. Some of these characteristics reflect the reasons for the relatively stable performance of European securitization markets during the financial crisis: (1) a strong funding relation to real economic activity; (2) traditionally conservative loan origination standards, with high equity participation by the originator under the same credit law as non-securitized loans (“skin in the game”); (3) servicing retained by the originator (servicer continuity) together with issuer due diligence; and (4) adequate post-issuance performance monitoring. Moreover, the conceptual treatment of securitization as part of ongoing balance sheet operations (with seasoned loans only) further reduces incentive problems (Jobst and Kiff 2011). In general, the concept of HQS should be applicable to all asset classes that support lending to the real economy (and especially SMEs), and is not limited to investment in senior tranches.28

Annex 11.3. Selected Official Sector Support for Securitization in Europe
CountryName of ProgramAmountPeriodDescription
European UnionEIB Group ABS Initiative for SMEs∼€10 billionsince 2013EIB Group provides facilities (funded and unfunded) to bank-sponsored securitization transactions via guarantees on mezzanine or senior tranches with minimum rating requirement (EIF), and acts as “structuring” investor in senior tranches (EIB). The initiative aims to restart the SME securitization market by facilitating deal execution through increased underwriting capacity and provision of credit enhancement to third-party investors. The ABS Initiative is expected to be combined with the SME Initiative.
European UnionEIF-CIP Securitisation Window under the SME Guarantee Facility€17 billion in SME finance for all CIP windows (about €0.5 billion in guarantees)2007–13EIF provided unconditional and irrevocable guarantees on securitization tranches with little credit enhancement to facilitate access to capital markets for unrated or low-rated issuers, such as smaller banks. The aim was to generate additional funding for SMEs; therefore, it combined guarantees on existing loan portfolios with a separate undertaking to build up a new portfolio of SME loans (under a separate “additional portfolio agreement”). The required size and composition of this portfolio depended on the size and the seniority of the guaranteed tranche. The CIP Securitization Window was provided under the EU 2007–13 Multiannual Financial Framework.
European UnionCOSME Securitization Window€1.4 billion2014–20The COSME program includes a capped guarantee and securitization support, which largely continues the activities of the EIF-CIP Securitization Window under the EU 2014–20 Multiannual Financial Framework. It envisages securitization of SME debt finance portfolios, to mobilize additional debt financing for SMEs under risk-sharing arrangements with the targeted financial institution. Support for the transactions is conditional upon an undertaking by the financial intermediary to use a significant part of the resulting liquidity or mobilized capital for new SME lending in a reasonable period. Relative to the EIF-CIP Securitization Window there will be some new elements with the aim of getting more leverage and targeting regional, smaller banks.
European UnionEC-EIB SME Loan InitiativeUp to €58 billion (€8.5 billion from structural funds, €0.036 billion from COSME/ Horizon 2020, and €36 billion to €49 billion from the EIB-EIF)beginning end-2014The SME Initiative is a joint initiative between the European Commission and the EIB Group and combines budgetary contributions from Structural Funds (European Structural and Investment Funds) and other EU programs (COSME/Horizon 2020) with the EIB Group’s own resources to support intermediated SME lending. There are two joint instruments envisaged: (1) a “guarantee facility” for new SME loans and leases, and (2) a “joint securitization instrument,” allowing for the securitization of existing and new SME loans and leases. Participation in the SME Initiative is voluntary. At mid-2014, only Malta, Portugal, and Spain participate in the program.
GermanyPROMISE Program€47.6 billion (until 2008)since 2000Securitization program created by national development bank Kreditanstalt für Wiederaufbau to provide capital relief to SME loan portfolios of sponsoring banks using a synthetic transaction structure; EIF has acted as a swap counterparty for the junior tranche (first-loss piece) and the mezzanine tranche in many transactions.
SpainFTPYME Program€3 billionsince 2000Spanish Ministry of Economy established a budgetary endowment for Programa de Fondos de Titulización de Activos para PYME (FTPYME) guarantees from the kingdom of Spain; provides guarantees for SME securitization if the originator commits to reinvest the liquidity in new SME financing. The guarantee is limited in size and contingent on rating of tranches: up to the 80 percent for tranches rated “AA” and higher, up to 50 percent of tranches rated at least “A” The asset portfolio transferred to the securitized fund must comply with the following requirements: (1) portfolio structure (only loans to domestic, nonfinancial firms; 80 percent of portfolio should be SMEs according to European Commission definition; initial maturity of loans greater than one year); (2) use of funding support (net funds obtained from securitization must be reinvested—50 percent within six months and remainder within one year); and (3) placement (all guaranteed bonds must be listed).
United KingdomSpecial Liquidity Scheme (SLS)No limit; £185 billion at peakApril 2008–January 2012The scheme allowed banks and building societies to swap their high-quality mortgage-backed and other securities for U.K. Treasury Bills for up to three years. Although the drawdown period for the SLS closed on January 30, 2009, the scheme remained in place for a further three years.
United KingdomAsset-backed Securities Guarantee Scheme (ABSGS)No limitApril 2009–December 2009Under the scheme, the Treasury can provide two types of guarantee to be attached to eligible “AAA”-rated ABS, initially in respect of residential mortgages, issued under the sponsorship of U.K. banks and building societies. The ABSGS offered a credit guarantee and a liquidity guarantee, though an eligible instrument may only benefit from one, not both of these. The credit guarantee was issued as an unconditional and irrevocable guarantee of the timely payment of all interest and principal due from an issuer and payable in respect of the eligible instruments. The liquidity guarantee covered the issuer’s obligation to redeem or repurchase securities pursuant to an issuer’s call option or a noteholder’s put option under the terms of the eligible securities.
Sources: Australian Office of Financial Management; European Commission; European Investment Bank; European Investment Fund; HM Treasury; Spanish Ministry of Economy and Competition; Italian Ministry of Finance and Economic Affairs; and Kreditanstalt für Wiederaufbau.Note: ABS = Asset-backed securities; CIP = Competitiveness and Innovation Framework Program; COSME = Competitiveness of Enterprises and Small and Medium-Sized Enterprises; PROMISE = Program for Mittelstand-loan Securitisation.
Sources: Australian Office of Financial Management; European Commission; European Investment Bank; European Investment Fund; HM Treasury; Spanish Ministry of Economy and Competition; Italian Ministry of Finance and Economic Affairs; and Kreditanstalt für Wiederaufbau.Note: ABS = Asset-backed securities; CIP = Competitiveness and Innovation Framework Program; COSME = Competitiveness of Enterprises and Small and Medium-Sized Enterprises; PROMISE = Program for Mittelstand-loan Securitisation.
Annex 11.4. Selected Official Sector Support for SME Finance in Europe
CountryName of ProgramAmountPeriodDescription
GermanyKreditanstalt für Wiederaufbau SME Program> €3 billionsince 1971Credit facility for German banks for SME loans with maturities up to 20 years; refinanced exclusively using capital market funds, which enables Kreditanstalt für Wiederaufbau to offer SMEs long-term investment loans while maintaining the principle of subsidiarity and on-lending through banks.
ItalySMEs Lending Facility (Fondo Centrale di Garanzia)€17 billion of issued guarantees activating €32 billion of new loans (end-2011)since 2000The institution provides guarantees of up to 80 percent of bank-originated credit facilities to SMEs.
IrelandStrategic Banking Corporate of Ireland€4 billion (until 2018)since 2014Initial funding of €500 million (to rise to €4 billion until 2018) provided by the Ireland Strategic Investment Fund together with KfW and the EIF to support on-lending (through commercial banks and other loan originators) to SMEs, aiming to reduce costs and improve flexibility of SME funding.
SpainInstituto Crédito Official SME financing facilityAnnual limits ranging between €2 billion and €7 billionsince 1993Credit facility for Spanish banks originating SME loans with maturities up to 10 years (possibility of grace period); for new and productive fixed assets only.
United KingdomFunding for Lending Scheme (FLS)No limit; 5 percent of stock = £80 billion at launchJuly 2012–January 2015The scheme provides funding to banks and building societies for an extended period, with both the price and quantity of funding provided linked to their lending performance. The FLS allows participants to borrow U.K. Treasury Bills in exchange for eligible collateral, which consists of all collateral eligible in the Bank of England’s Discount Window Facility. The Bank and HM Treasury announced an extension to the FLS on April 24, 2013, with incentives to boost lending skewed toward SMEs.
Sources: Australian Office of Financial Management; European Commission; European Investment Bank; European Investment Fund; HM Treasury; Spanish Ministry of Economy and Competition; Italian Ministry of Finance and Economic Affairs; and Kreditanstalt für Wiederaufbau.
Sources: Australian Office of Financial Management; European Commission; European Investment Bank; European Investment Fund; HM Treasury; Spanish Ministry of Economy and Competition; Italian Ministry of Finance and Economic Affairs; and Kreditanstalt für Wiederaufbau.
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This chapter is based on Euro Area Policies: Article IV 2014 Consultation—Selected Issues, “Capital Market Development: SME Financing in the Euro Area,” IMF Country Report 14/199, 2014.

1

The survey covers about 7,520 firms, of which 93 percent are SMEs.

2

SMEs are defined by the European Commission as having fewer than 250 employees. They should also have an annual turnover of up to €50 million or a balance sheet total of no more than €43 million (Gagliardi and others 2013).

3

See Darvas (2013) for more information on SME finance in Europe.

4

For the purposes of venture capital and growth funding, SMEs are defined solely by the number of employees in the EVCA data set. See also Kraemer-Eis, Lang, and Gvetadze (2014).

5

Many large European banks depend on either a large deposit base or rely on wholesale funding for large parts of their balance sheets. Securitization of SME loans would increase secured funding for lending over longer terms, creating high-quality collateral and transferring credit risk to nonbank investors.

6

Up-front costs related to the due diligence process required to securitize assets can be significant. Credit enhancements (for example, high subordination levels for senior tranches, overcollateralization, and interest reserve accounts) may also often be required by ratings agencies, especially if many reference assets in the securitized portfolio are unrated.

7

See Bank of England and European Central Bank (2014b) for a comprehensive discussion of regulatory impediments to securitization. See Segoviano and others (2013) for a general discussion on the reform process in securitization markets.

8

Upon conclusion of the final consultation on the regulatory treatment of securitization exposures held in the banking book, the Basel Committee (BCBS 2014) proposes higher risk weights for exposures rated “BB+” or higher, yet a lower and more risk sensitive approach for securitization tranches rated “BB” or lower. For instance, the risk weighting on “AAA”-rated tranches will increase from 7 percent to 25 percent in the five-year tenor under the standardized approach.

9

The European Commission has recently proposed further lowering the currently proposed capital charge of 4.3 percent per year of duration to be assigned to the highest-quality ABS instruments as an attempt by the European Insurance and Occupational Pensions Authority to differentiate such assets from lower-quality ones.

10

Note that Solvency II assigns a lower capital charge for covered bonds compared with other nongovernment or unsecured assets. Furthermore, covered bonds will be exempted from “bail-in” that would subject unsecured senior debt of failed banks to forced write-downs or conversion into equity in resolution.

11

However, it is currently being debated at the European level whether exposures that are consistent with the concept of HQS could be included in the EU liquidity coverage ratio under the CRR.

12

Note, however, that some SME-loan-backed transactions with nongranular reference portfolios, especially those including unsecured (mezzanine) loans, did experience significant downgrades and defaults during the financial crisis. These transactions represented only a small part of the market and did not exhibit the properties of HQS listed in Annex 13.2.

13

As opposed to credit insurance, an EIF guarantee also implies a substantial leverage effect. In structured transactions, the risk transfer can be achieved with a limited nominal EIF guarantee exposure that covers only a small portion of the loan portfolio but results in significant “rating uplift” for more senior investors.

14

Under this agreement, the EIF took the second-loss risk, and Italian mutual guarantee funds (Confidi) took the first-loss tranche, reducing the capital requirement for the originating bank (Unicredit) and facilitating Italian SMEs’ access to €120 million of new loans.

15

These charitable foundations act as majority shareholders of the SPV to achieve tax-exempt status, and thus eliminate income taxation on funds managed by the SPV. The use of multiple foundations ensures the loans are “bankruptcy remote” from the originating banks. TSI Services GmbH, a limited-liability subsidiary of TSI, organizes and coordinates the establishment of the SPV.

16

The acceptance of such assets as collateral for Eurosystem credit operations is still being assessed.

17

These recommendations have been further developed in Aiyar and others (2015), and have been presented in a Joint EIB-IMF workshop on SME securitization in Europe on October 23, 2014, in Brussels/Belgium (Aiyar, Barkbu, and Jobst 2014).

18

Any securitization transaction would require a structure under which issuers would not be parting with their assets without making some kind of return or gain on sale. Doing so depends on the spread payable to investors as well as on the asset yield and the size of the risk retention.

19

In May 2014, the Bank of England and the ECB (2014a, 2014b) published a comprehensive review of existing obstacles to the better functioning of the securitization market in the European Union, which includes some arguments that are also reflected in these recommendations.

20

HQS can, in principle, also help meet the increasing demand for high-quality collateral, providing a complement to government debt.

21

However, there is discussion about the potential inclusion of a wider range (wider than RMBS) of highly rated (“AA—” or higher) securitization exposures, namely auto ABS, SME-backed collateralized loan obligations, and consumer ABS, as Level 2B (which are capped at 15 percent of HQLA) with a 25 percent valuation haircut.

22

In particular, the lack of long time series data on the default frequency of SMEs; the heterogeneity of SME portfolios that differ from each other in size, corporate form, business activity, and geographic location; and insufficient volumes of long-term loans (which complicate the estimation of the cash flows pattern of SME portfolios) continue to hamper SME securitization.

23

Throughout the crisis, the ECB has widened the pool of eligible assets under its collateral framework for refinancing operations. Raw loans (“credit claims”) are eligible collateral for refinancing at the ECB if they are rated “BBB” or higher. Assets rated “BB” can be used as collateral provided the national central bank of the Eurosystem underwrites the credit. The ECB last reviewed its haircuts on eligible assets in July 2013.

24

SMEs accounted for 80 percent of total employment (and about 70 percent at end-2013) and more than half of manufacturing value added in Japan.

25

The program was ended in March 2006 together with the exit from quantitative easing.

26

The BoJ set the maximum amount of purchases at 1 trillion yen (3/4 percent of the BoJ’s assets). The total amount of outstanding securitized bonds in Japan was 44.5 trillion yen in 2007 (33 trillion yen in 2013). About half of this amount was trust beneficiary rights. The outstanding amount of asset-backed commercial paper remains small, especially after its decline from 4.4 trillion yen in 2007 to 1.8 trillion yen in 2013.

27

Note that limiting eligibility only to tranches with a very high rating would exclude most senior tranches of very high quality by issuers in stressed economies, whose ratings are capped by the sovereign ceiling of the respective country, which would contradict the intent of delinking the regulatory treatment of HQS from sovereign risk.

28

It is also important to support more junior tranches of safe and robust structures, especially via improvement of data and analytics, eventually allowing a broad investor base and risk transfer between bank and nonbank sectors.

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