Wednesday, May 15, 2013

Bank of France turns to "super" transparency to restart securitization in EU

Bloomberg reports that the Bank of France is rolling out what it believes is the model for restarting securitization in the EU.

The distinguishing feature of the Bank of France's model is the reliance on making these deals "super transparent" so that market participants can know what they are buying and know what they own.

This is precisely what your humble blogger has been calling for since the earliest days of the financial crisis.

Why would the Bank of France feel the need to roll out deals that are "super transparent" when the ECB has already endorsed the level of transparency provided by the EU DataWarehouse?

Because the Bank of France sees that the EU DataWarehouse doesn't bring transparency that would allow an investor to know what they own or a buyer to know what they are buying.  Rather, the EU DataWarehouse is the industry's effort to retain opacity at the levels associated with opaque, toxic subprime mortgage-backed securities.

Please note, that the Bank of France recognizes that the only way to reduce, if not totally eliminate, the rating firms' role in securitization is to make the deal "super transparent".  When a deal is "super transparent", reliance on rating firms is greatly reduced as investors can do the analysis for themselves or hire a third party expert.

Regular readers know that your humble blogger has defined what it takes for a structured finance deal to be "super transparent".

First, the deal must provide observable event based reporting under which all activities, like a payment or delinquency, involving the underlying collateral are reported to market participants before the beginning of the next business day.

Second, the deal must make available all data fields tracked by the originator of the underlying collateral and the servicer of this collateral.  These firms are experts and would only track data fields that are relevant for valuing or monitoring the underlying collateral.  There is no legitimate business reason for depriving market participants of the right to piggy-back off this expertise.

The Bank of France wants to help banks package loans to businesses into tradable securities with the creation of a special-purpose vehicles, in what could become a template for the euro area. 
As the European Central Bank looks for ways to improve the flow of credit to small and medium-sized enterprises, or SMEs, the project started by the French central bank in July last year could provide one possible solution, the head of its markets division, Alexandre Gautier, said in a telephone interview. 
He’s in talks with the Frankfurt-based ECB and other national central banks on the initiative, which would ideally create securities that qualify as collateral in ECB refinancing operations. While banks can currently securitize SME loans and use them as collateral at the ECB, the process is complicated and not centralized. 
“We want a vehicle that is super simple and super transparent,” Gautier said. “We’d very much like these securities to be eligible in the euro system, but it’s not a condition. We’ll go ahead on our own if we have to to show that it’s doable.”... 
The aim is to make it easier for banks to re-finance existing loans and incentivize them to extend credit to small businesses. That would especially be the case if the new securities were eligible as collateral with the ECB, said Gautier. 
“The banks were very interested but they said that to make it really attractive, any securities should be eligible as collateral for refinancing within the euro system so that they would be liquid in the event of a crisis,” he said. “That’s now what we’re aiming for.” 
ECB President Mario Draghi said on May 2 that policy makers will start consultations with other European institutions on initiatives to promote lending to SMEs in the euro area using asset-backed securities.

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