Industry bodies have pushed back against claims that much of credit securitisation still relies on “magical thinking”, arguing that the accusation “mischaracterises” the modern European market.
The International Association of Credit Portfolio Managers (IACPM), along with several other industry associations, has co-signed a response to an article published in the Financial Times this week on securitisation.
The industry leaders disputed four main claims made about securitisation: comparisons between current practices and those of 2008; the suggestion that transactions are driven by capital arbitrage; the conflation of Significant Risk Transfer (SRTs) with Collateralised Loan Obligations (CLOs); and the assertion that AAA and AA-rated securities are more vulnerable to credit deterioration than other fixed-income products.
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In their response, the industry bodies argued that comparing current practices to those before 2008 overlooks the regulatory reforms implemented since then, which have enabled “securitisation to play a constructive role in supporting Europe’s growth”.
This “mischaracterises the modern European securitisation market,” the industry response said. “Outdated fears risk holding back one of the EU’s most transparent, well-regulated and effective channels for supporting sustainable growth.”
The sector argued that securitisation and SRTs help banks manage credit risk “safely, freeing up capital to support lending to households and businesses”.
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Addressing the conflation of SRTs with CLOs, the industry bodies drew a distinction between the two, noting that the former is a risk and capital management tool subject to regulatory scrutiny, pre-trade supervision, and EU and UK regulatory frameworks. While the latter are vehicles for channelling investor capital, primarily to sub-investment-grade corporates.
In response to the claim suggesting that AAA and AA-rated securities are more vulnerable to credit deterioration than other fixed-income products, the sector said that this “ignores over 40 years of European asset-backed security data”, which shows that defaults and losses have compared closely to other fixed-income products with similar ratings.
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