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INTRODUCTION

Since the beginning of the recent world financial crisis, there have been many issues

discussed about asset securitization. Many economists point directly to the securitization,

enacted in 2007, as a major cause of the crisis in the mortgage market in the United States. As

a result, the image of this method of financing has significantly been affected. Capital markets

have been paralyzed over a long period of time. Nevertheless, blaming securitization in the

current issues of the world economy is like blaming a car crash caused by an unprofessional

driver.

The development of the securitization market in recent decades has a huge impact on

the global capital markets. Through securitization, new classes of debt instruments had access

to the market for new participants, including corporations, which contributed to the expansion

and deepening of the capital market. In addition, securitization allows originators to

implement effective realization of assets, to ensure improvement of its financial performance

and to obtain financing on more favorable terms.

Securitization offers investors the opportunity to invest in assets that would be

unavailable to them otherwise, and significantly expands the supply of bonds with a high

rating. Thus, securitization - is a highly effective tool to diversify funding and risk for

investors and originators.

First introduced in the early 1970s in the United States as a way of realization of

mortgage debt securitization gradually grew over time to cover the different types of assets, to

create securitization mechanisms and the market infrastructure securities backed by assets.

Later, along with the banks other financial institutions began to carry out the securitization.

THE CONCEPT OF SECURITIZATION: THEORETICAL FOUNDATIONS AND

THEIR REVISION AFTER THE CRISIS

For the first time the term "securitization" was appeared in 1997 in the Wall Streel

Journal. This term head of the department of Salomon Brothers Mortgage L. Ranieri

suggested to use in the article of the first issue of the underwriting of securities, secured rights

to demand for mortgage loans (Mortgaged-backed securities, MBS). Despite the rapid

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development of the market in the United States, the only accepted by all definitions of

securitization has not appeared.1

Let us represent some of the most common in our view definitions of securitization:

1. Securitization can be defined as a process of packaging individual loans and other

debt instruments, converting the package into a security or securities, and enhancing

their credit status or rating to further their sale to third-party investors.2

2. Securitization is the financial practice of pooling various types of contractual debt

such as residential mortgages, commercial mortgages, auto loans or credit card debt

obligations and selling said consolidated debt as bonds, pass-through securities,

or collateralized mortgage obligation (CMOs), to various investors.

3. In the broad sense the securitization includes all transactions carried out with assets

or liabilities related to the issue of securities.3

1Article Aksenov, Golikov "securitization of mortgage loans in Russia: Problems and Prospects",

Экономическийжурнал, № 1 (33) / 2014

2L.T.Kendall, Securitisation, A New Era in American Finance, [w:] Leon T. Kendall,Michael J. Fishman [red.], A

Primer on Securitisation, MIT Press, Massachusetts 1996, s. 1-2

3Bogusław Półtorak , Sukurytyzacja kredytu hipotecznego na podstawie działalnoscibankowhypotecznych,

CeDeWuSp.z.o.o , Wydanie II, Warszawa 2010 (dodruk), s.124

4

Figure 1. Process of Securitization

Source: Andreas Jobst, What is securiritization, Finance & Development September 2008

http://www.imf.org/external/pubs/ft/fandd/2008/09/pdf/basics.pdf (Access date: 10.05.2015)

The implementation of the securitization of assets through SPV allows you to separate assets

that provide payments for securities purchased by investors from certain risks.

Of course, traditional asset securitization was successful on the global financial

markets. However, in some countries there were legislative and legal difficulties or

constraints that did not allow companies to use this method of funding sources. This problem

was faced by the countries of Europe. Also, the inability to use the traditional method of

securitization could be caused by a ban on the transfer of assets to a third party originator. The

solution of these problems is the use of a synthetic securitization. Synthetic securitization

assets appeared in the 1990s. The main reasons for its occurrence were not only limits which

did not allowed to use the previous method, but also the active development of the credit

derivatives market. Now the companies are more attracted to hedge their credit risk, while

low-cost and long-term financing pushed aside.

Synthetic securitization is the European approach to asset securitization. Synthetic

securitization is the transfer of credit risk, utilizing credit derivatives (e.g. funded credit-

linked noted or unfunded credit default swaps), with objective of hedging the credit risk, to

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which the originator is exposed.4 A Synthetic securitization differs from the a true sale

transaction is that the ownership of the assets remains with the originator and only the risk is

transferred over to the vehicle. Assets are not sold to the SPV, henceforth no cash transaction

between the two parties take place.5

In fact, credit derivatives differ from conventional derivatives in that they deal with

credit risk, while the traditional focus on market risk factors such as currency exchange rates,

prices, indices or interest rates. From using these tools, the credit risk or risks associated with

maintaining market position, is transferred to third parties –protection sellers. In other words,

the originators do not sell the securities outright to the issuer (called “true sale securitization”)

but instead sell only the credit risk associated with the assets without the transfer of legal title.

Before the global financial crisis of 2007-2008 a regulatory arbitrage was among the

key drivers for the banking sector to apply securitization as the refinancing tool for long-term

assets, mainly mortgages. On this point, Tavakoli and Achleitnerhighlight benefits for banks,

which come from the opportunity to gain flexibility in complying with capital adequacy

requirements and in management of the credit portfolio6. As banks have to keep an

appropriate amount of equity related to the value and quality of their assets, true-sale

securitization enables them to free up some capital and extend new loans. Servigny and Jobst7

recognize a significant reduction of capital requirements which can be achieved by

securitization of mortgage portfolios and some limited reductions in the case of retail and

SME loans portfolios. The implication of the regulatory arbitrage seems to be beneficial not

only for the banking sector with its decreased capital requirements, but also for households

and businesses, which in theory are supposed to get access to more credit resources. However,

practice the regulatory amenities turned out to be different from the theory. Lax origination

standards driven by monetary policy rates which had been too low for too long 8and by the

4Jobst (2001) pp. 6-7

5Senanayake, Nadine: Asset-backed Securitization and the Financial Crisis. The Product and Market Functiin of

Asset-backed Securirzatioin: Retrospect and Prospect, Hanburg, DiplomicaVerlag GmbH, 2010, s.17-18

6Tavakoli, J. M. (2008). Structured Finance and Collateralized Debt Obligations: New Developments in Cash and

Synthetic Securitization. Wiley Finance Publishing; Achleitner, P. (2007). Investment Banking, Keynote lecture at the WHU-Otto Beisheim School of Management, Vallendar, Germany. Fall semester 2007-2008. 7Servigny, A., Jobst, N. (2007). The Handbook of Structured Finance. McGraw-Hill.

8 Maddaloni, A., Peydro, J.-L. (2010). Bank Risk-Taking, Securitization, Supervision and Low

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urge of managers towards excessive volumes of assets for the securitization purposes led to

uncontrollable issuance of ABS, secured by asset pools with poor fundamentals. Banks were

not inclined to securitize their top-rated and secure assets and mortgages, while the

securitization technique posed for some banks an opportunity to repack their low quality loans

and transfer them to the financial market. Several European experts, who were familiar with

this matter, including Bärand Hies, warned in the 1990s of a moral hazard which appears in

such a situation and about the possibility of worsening origination standards. However, due to

the excessive popularity of asset securitization in general and collateralized debt obligations

(CDO) in particular, most experts and scientists were focused on the benefits, diminishing the

shortcomings and negative side effects of it. Another stumbling block in the pre-crisis

architecture of the ABS market is the information asymmetry. Two aspects have to be pointed

out with this respect: the non-transparent ABS structures, which provide an opportunity to

mislead investors, and the concealment of information on behalf of rating agencies. In order

to persuade investors to invest their money in ABS, data regarding the underlying pool and

deal structure are supposed to be fully disclosed, which, in turn, is treated by some originators

as a huge obstacle and disadvantage of securitization as a method of refinancing9. In an

attempt to mitigate a costly and time-consuming process, disclosure and monitoring

procedures were simplified with applying the rating of the asset pool and shifting the

responsibility for its adequate valuation to the rating agencies. Therefore, the only

counterparties, who knew all of the information, were originators and rating agencies. The

latter took under control the ABS market by selling their ABS’ appraisal to originators, so that

ordinary investors could base their investment decisions on nothing but external ratings10

. In

addition, overreliance on the diversification effect11

and application of the models aimed at

evaluating debt but not structured products 12

, are listed among the shortcomings on behalf of

the rating agencies, which have contributed to the crisis. European banks in general and

German Landesbanken in particular became the main victims of the strategy of limited and

Interest Rates: Evidence from the Euro Area and the U.S. Lending Standards. ECB Working Paper, No 1248. 9 Hies, M. (1996). Die Refinanzierung deutscher Hypothekenbanken. Frankfurt am Main. Knapp.

10 Booth, P. (2009). Verdict on the Crash: Causes and Policy Implications. The Institute for Economic Affairs,

London.; Zandi, M. (2009). Financial Shock: A 360 Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis. Pearson Education. New Jersey. 11

Brämer, P., Gischer, H., Richter, T. (2011) Banksystem und Regulierung. Schriften des Vereins für Socialpolitik. Band 331. Duncher&Humblot. Berlin. p. 11-28. 12

Hull, J. (2009). Risk Management and Financial Institutions. Second edition. Pearson. p. 342

7

selective transparency. Having the same triple-A rating, ABS stood out against the

background of low-profitable AAA-rated securities, which made them extremely lucrative for

the German Landesbanken. As a result, German commercial banks met a loss of €79 billion,

following the UK by the volume of write-downs, from which approximately one third

belonged to Landesbanken. For this reason, improving the level of transparency was

prioritized by the regulators in their post-crisis approach towards regulation of the ABS

market.

Another advantage of securitization for originators is the ability to better match

duration of assets with duration of liabilities13

. The point is that this benefit can be derived

under a margin-based banking model, whereas under a commission-driven model it becomes

relevant to a lesser extent than is claimed and expected by economists. To exemplify this

statement, we use a balance sheet’s structure of Hypo Real Estate bank, which was

characterized by a total mismatch between long-term assets and long-term liabilities. As of

September 30 2008, €244 billion in over-five-years assets were matched with only €75 billion

of liabilities with the same maturity14

. An analogous situation could be observed throughout

the entire banking sector in the EU. Thus, securitization is able at best to abate the problem,

but not to solve it, and only under certain circumstances. The crisis, along with using the core

pre-crisis values of securitization, helped to reveal the new benefits of it. During the crisis, for

the originators an extra motive has emerged to conduct securitization transactions, i.e.

European Central Bank repo facilities. Since the access to the unsecure funding market was

hampered, the fact that low-rated ABS could be pledged as collateral with ECB operations

significantly alleviated the painful shut-down of the primary and secondary ABS markets in

2007 and in 2008. Additionally, given the unprecedented scope of ECB repo operations with

ABS, some smaller banks, for instance, captive banks specialized in limited banking

activities, were granted access to a broader range of refinancing instruments. With the upward

trend in the auto-ABS market and better funding levels, non-financial corporates can benefit

from the current distressed markets and even tap ECB refinancing sources.

13

Hies, M. (1996). Die Refinanzierung deutscher Hypothekenbanken. Frankfurt am Main. Knapp. 14

Bank quarterly report, 2008.Q.3

8

MODERN SECURITIZATION MARKET IN POLAND AND PROSPECTS OF ITS

DEVELOPMENT

At the onset of the recent financial crisis there was a big discussion about

securitization. Some economists pointed to the securitization as the main cause of the crisis in

the US subprime market. The securitization transactions have started to be treated with

reserve by the participants of the Polish market It was feared that Polish investors can share

the fate of investors from the US market. With time, however, these fears have been

dissipated. Entities interested in the capital market securitization worked constantly to

improve the image of securitization transactions. Investment banks, especially operating in

the US market, have developed their own solutions, aimed at improving the transparency of

securitization transactions and, consequently, also of safety.15

According to the available information, securitization transactions carried out on the

Polish market differ significantly from transactions on foreign markets. Data for Europe

suggests that they are most often subjected to debt securitization of mortgages. In Poland,

however, there is a lack of appropriate regulation and incentives to use securitization

transactions of receivables secured by mortgages on real estate. Polish securitized securities

rarely have a rating, which is usually transmitted in the case of foreign securitization issuance.

Typical form of Polish issuance is the use of securitization fund as the

organizational form of the SPV. Organizational form SPV depends on the structure of the

securitization transaction. The choice of organizational form can influence this market and tax

legislation in force in the country. In Poland, currently the most SPV is appointed as a closed-

end investment fund. This is mainly due to the existence of preferential tax legislation relating

to securitization transactions involving the securitization funds. In Poland, securitization

funds emerged in 2005after the entry into force of the Act on investment funds, creating

conditions for this type of activity funds in 2005.

The first transaction of transfer of receivables to a securitization fund (S-Collect

FIZNFS) was conducted by PKO BP SA and PKO / Credit Suisse TFI. This transaction

involved the purchase of the portfolio of approximately 73thousand doubtful receivables, with

a nominal value of approximately 660 million PLN.16

Until now, the Polish market for securitization funds has been created mainly for

specific investors and that significantly limited the access to this type of investment to other

entities. In view of the fact that banks (originators of securitization) were not interested in

disposing of fixed income debt the only form of securitization fund, which until now has

been used in the transactions was standardized fund.17

15

P. Jenkins, Securitisation reinvented to cut costs, „Financial Times”, 5.07.2009. “Smart” securitization,

“Financial Times”, 5.05.2009.

16D. Liskowska, Fundusze sekurytyzacyjne jako forma refinansowania wierzytelności, *w:+ K. Gabryelczyk (red.),

Nowe usługi finansowe, CeDeWu, Warszawa 2006, s. 20.

17N. Chudzyoska, Fundusze sekurytyzacyjne bez świetlanej przysPLNości, „Gazeta Giełdy Parkiet”, 31.02.2009.

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Standardized securitization funds, by virtue of the applicable regulatory restrictions

on the construction fund, are seen as less flexible, especially in the area of the creation of the

investment portfolio.

Most current operating securitization funds were created by debt collection

companies or groups of companies linked to them.18

For other funds, investment funds

management outsourced portfolio management to specialized debt collection companies. In

addition, the following investment fund companies also offer securitization funds: Allianz

Polska (KredytInkaso I NSFIZ), BEST TFI (BEST II NSFIZ and BEST III NSFIZ), Idea TFI

(GPM Vindexus NSFIZ, Electus NSFIZ), Skarbiec TFI (EGB Podstawowy NSFIZ ), Intrum

Justitia TFI (Intrum Justitia Debt Fund 1 FIZNFS), IPOPEMA TFI (Corpus Juris NSFIZ). 19

By 30 April 2015 - 21 investment funds that manage 72 securitization funds were

registered.20

According to the EFAMA Poland ranks second in Europe in terms of number of

existing securitization funds (Figure 2).

Figure 2. Structure of the European market for securitization funds (the

number of securitization funds at the end of 2014.)

18

M. Dębniewska, J. Długosz, Znaczenie i rozwój sekurytyzacji na rynku finansowym, *w:+ A. Bogus, M. Wypych

(red.), Harmonizacja rynków finansowych i finansów przedsiębiorstw w skali narodowej i europejskiej, Difin,

Warszawa 2007, s. 380.

19Rynek funduszy inwestycyjnych zamkniętych w Polsce, op. cit., s. 12.

20 See

http://www.knf.gov.pl/dla_rynku/PODMIOTY_rynku/Podmioty_rynku_kapitalowego/Wykaz_TFI_i_FI_HTML.html (acces date: 18.05.2015 )

2

205

31

Belgium

France

Poland

10

Source:Chamber of Fund and Asset Management (IZFiA),

http://www.izfa.pl/pl/index.php?id=10101&path=//0gjmft`vtfs0`DBUBMPH12031250R50 (Access date:

17.05.2015)

Also according to the EFAMA Poland ranks the third in Europe, taking into account

the value of assets held in securitization funds (Figure 3).

Figure 3. The net asset value of European securitization funds in EUR million (end of

2014).

Source:http://www.izfa.pl/pl/index.php?id=10101&path=//0gjmft`vtfs0`DBUBMPH12031250R50 (Access date:

17.05.2015)

The State of development of the performing debt market in Poland.

Securitization market of performing loans is not functioning in Poland currently. In

recent years only two significant transactions were carried out by banks in Poland. One of

them was by the Millennium Group member company Millennium Leasing Sp. Z oo - a 100%

subsidiary of the Bank, concluded on 14.12.2007. It included agreements relating to

securitization of future receivables portfolio of leasing contracts for an amount of up to 850

million PLN. None of the transaction did not include mortgage debt. In 2006Raiffeisen Bank

Poland SA (RBPL) and Czech Raiffeisenbank as (RBCZ), subsidiaries of Raiffeisen

International Bank-Holding AG, and the German KreditanstaltfürWiederaufbau (KfW),

conducted the first and largest synthetic asset securitization transaction in Central and Eastern

0

220 000

918

Belgium

France

Poland

11

Europe. It covered a portfolio of loans granted to small and medium-sized enterprises in

Poland and the Czech Republic with a total value of 450 million Euros, of which Polish

market accounted for about 270 million Euros. The transaction involved two types of loans:

fixed term and revolving credit facilities for small and medium-sized businesses, granted by

the RBPL and RBCZ 943 Polish and Czech businesses. The organizers of the transaction

were Dresdner Kleinwort Wasserstein (DrKW) and RaiffeisenZentralbankÖsterreich AG

(RZB). The European Investment Fund (EIF) took part in it as an investor. The transaction

was to transfer the risk of insolvency of the portfolios of both banks to KfW via credit default

swaps. Securitization agreement byRaiffeisen Bank SA is valid until 2019.

In 2012Getin Noble Bank SA conducted the first on the Polish market portfolio

securitization transaction of approximately PLN 1 billion of auto loans, addressed to

professional investors in the Polish capital market. The transaction was co-organized by Bank

Handlowy SA ("BHW") and Citi Group companies, responsible for the structuring. BHW

served as a bond dealer at a local market. European Bank for Reconstruction and

Development (EBRD) played the role of a strategic investor. As SPV Polish company

specially established for this purpose was used. This company is owned by a foundation under

Dutch law. This is called The orphan foundation, with legal personality, but not founders.

The state of development of the Non-performing debt market and the situation of

securitization funds by the 31.12.2012 in Poland

Since the amendment of the Act on investment funds of 2004 Non-performing debt

market developed rapidly with the use of securitization funds. Replacing of the first issue of

bonds by non-standardized securitization closed-end investment funds (NSFIZ) was an

important event for the development of the debt market after 2010.In mid-2011 BEST II

NSFIZ and BEST III NSFIZ acquired respectively 58 million PLN and more than 56 million

by issuing debt securities PLN. It is worth noting that another bond issue made by NSFIZ

took place only at the end of 2012 (CERES NSFIZ). The fund was expected to raise the

nearly 3 million PLN. Cash collected by NSFIZ was used to purchase doubtful receivables

arising mainly in the banking sector. The chart below shows the value of irregular debts in the

retail and corporate banking sector. At the end of November 2012 irregular retail and

corporate loans amounted to a total of about 71.4 billion PLN (right scale), of which 39.9

billion PLN were retail loans. Due to the nominal growth of the banking sector, including less

claims mortgage ratio, the total share of irregular loans did not exceed 8.8% of total loans in

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the sector (left scale). The graph shows the value of transactions on irregular receivables,

which in 2012 is estimated at about approximately 9.3 billion PLN (data KPF).

Graph 2.Non-performing loans market in Poland 1993- XI 2012.

Source: Study on KPF based on NBP data (Raport z prac Grupy ds. sekurytyzacji wierzytelności

ASSET-BACKED SECURITIES MARKET IN THE EU

The financial crisis has raised many questions over perspectives of securitization as a

funding tool. Distressed companies, significant write-downs and bail-outs of the banks on

behalf of the government are just a few destructive implications of the improper application of

the securitization technique. Such an environment requires the necessity of having a sound

foundation for securitization’s re-emergence in the EU market. Since the basic idea behind

securitization hinges on the segregation of assets from the bank or other originators, the

chances for a revitalization of the securitization market correlate strongly with the quality of

underlying collateral and the quality of the deals themselves. For this reason the securitization

market in the EU is dominated by AAA-rated ABS (Figure 4). The crisis has not substantially

changed the structure of the outstanding issues of ABS in terms of received rating. In contrast,

the share of issues with the highest rating has dropped over the post-crisis period. In 2008

approximately 60% of the US market of ABS consisted of AAA-papers, whereas in 2011 it

amounted to 25%. Coming back to the core benefits of using securitization, the high

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proportion of AAA-rated securities even in the post-crisis period shows that European

standards of ABS deals are consistent with the principles of high quality collateral, and, in

general, only fully performing loans were chosen for the asset pool.

Figure 4. Credit quality of the ABS market in the EU and the USA

Source: S. Kozak, O. Teplova, Securitization as a tool of bank liquidity and Funding management

before and after the crisis: the case of the EU, Financial Internet Quarterly „e-Finanse” 2012, vol. 8, nr 4

Market activity in the ABS segments can be observed in RMBS (residential

mortgage-backed securities) and autoABS subsectors. Moreover, after the crisis the ABS

market is characterized by a contraction in terms of volume. Between 2009 and 2010 volumes

of the newly issued securitized products in the EU has stabilized at the level of approximately

€360 billion, after reaching a maximum of €768 billion in 2008. The post-crisis structure of

the market is seriously limited by distinct ABS classes, which can satisfy the risk and

premium appetite of investors. Such ABS include:

1) RMBS – securities mostly issued in the Netherlands and the UK,

2) ABS in a narrow sense – in particular, securities backed by auto-loans, by auto-

leases and also by SME loans.

In the EU, the SME segment was primarily supported by the governments of Spain

and Germany due to programs launched in:

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1) Spain – FTPYME securitization scheme21

,

2) Germany – KfW’s German PROMISE platform22

.

As the SME sector has a vital meaning for a real economy, especially in times of

macroeconomic instability, refinancing of activities based on lending to SMEs were highly

underpinned by European institutions, including ECB repo programs.

Mortgages are traditionally considered desirable assets for refinancing due to their

longevity features; therefore, RMBS have the lion’s share of the ABS market in the EU even

after the crisis. The RMBS’ share accounted for 60% in 2010, whereas the peak, equal to

72%, was reached in 2008. After the crisis, the UK and the Netherlands are the main players

in this segment of the market, since legal and organizational infrastructures are better

designed for the issuance of RMBS rather than for the alternative instruments of mortgage

refinancing – covered bonds. ABS in a narrow sense occupied 20% of the ABS market in

2010. This subsector is mostly represented by the German auto-ABS23

. Commitment of

German originators in the period of crisis to high quality standards, transparent deal structures

and a domestic base of investors provided the auto-industry in Germany with a secure funding

tool24

. Moreover, the conceptual features of auto-ABS are able to meet the needs of the real

sector and investors due to their linkage to the production sector, limited risks of captive

banking structures and medium-term structures25

. Such circumstances provide this sector with

bigger room for development through the coming years. The generic CDO sector rapidly

appeared in the mid-2000s, when the value of these transactions nearly doubled from €36 in

2005 to €57 billion in 2006. Despite the substantial growth in the CDO sector in 2008, caused

21

FTPYME – Asset Securitization Funds for SMEs run by the Spanish Ministry of Industry, Energy and Tourism (http://www.ipyme.org/en-us/Financiacion/FondosTitulizacionfinanciacion/Paginas/TitulizacionFinanciacion.aspx 22

PROMISE (Promotional Mittelstand Loan Securitisation) – the platform run by KfW for securitization of SMEs loans (KfW stands for KreditanstaltfürWiederaufbau; http://www.kfw.de/kfw/en/KfW_Group/Asset_Securitisation/KfWs_Securitisation_Platforms/PROMISE_/index.js). 23

Barclays Capital (2011). European Securitization Outlook 2011: The Moment of Truth. Available at: www.markit.com. 24

Teplova, O. (2012). The Impact of the Global Financial Crisis on the Process of Transformation of the Asset-backed Securities Market in the EU (the case of Germany). Dissertation at St. Petersburg State University of Economics and Finance, St. Petersburg, Russia. 25

Ohl, H.-P. (1994). Asset-backed Securities: ein innovatives Instrument zur Finanzierung deutscher Unternehmen. Wiesbaden, Gabler.

15

by easing of the eligibility criteria for the repo operations with the ECB, in 2010 the CDO

market can be marginalized, since investors demonstrate no interest in such transactions.

Drivers of future development of the market in the EU

The future of the ABS market in the EU is strongly impacted by the debt crisis in the

Eurozone, which in turn may affect the pricing levels of sovereign debt by the availability of

assets for securitization purposes and by the new regulatory approach, including the ECB role

in maintaining the market. The debt crisis in the Eurozone and subsequent widening of the

spreads for sovereign debt instruments has become a stumbling block for the debt form of

financing. Figure 5 presents a sharp rise in the pricing levels for sovereign debt in the selected

countries of continental Europe, whose securitization markets constitute the lion’s share of the

EU market. These countries can be sorted into two groups. In one group, which consists of

Germany, the Netherlands and France, the debt crisis had a moderate impact on the costs of

debt financing. The pricing levels of the rest of the countries have experienced an adverse

impact of the crisis with some visible differences within the group. Thus, debt problems in the

Eurozone pose a serious threat to securitization as a refinancing tool. Worsening financial

conditions in these countries has put some constraints on the revival of the securitization

market increasing costs of funds. As a result, the number of countries which have access to

the market after the crisis is limited.

A loan contraction, which occurs in the post-crisis period, is another driver

contributing to the reshaping of the market of secured funding instruments in the EU. The

volume of assets that can be potentially used for securitization purposes has greatly declined

after 2007. Since 2008 the net loan issuance’s indicator has entered the negative zone, driven

by a sharp decrease in loan supply to creditworthy borrowers and a dramatic growth in

redeemed loans. Loan redemption has doubled between 2007 and 2010, whereas loan supply

remained fairly stable after an abrupt drop in 2008, when the amount of granted loans to non-

financial corporates plunged from €350 billion in 2007 to €177 billion in 2008. Both trends

are caused by the worsening credit conditions due to restrained origination activity and the

limited number of credit prolongations. Credit scrutiny and deteriorating macroeconomic

fundamentals are conducive to exit strategies from the securitization market in favor of

alternative secured funding instruments – covered bonds. The secured funding segment might

tend to be highly competitive among the remaining players.

16

Changes in the regulation of the securitization market introduced by the supervisory

authorities have indirectly altered the motive behind ABS deals in the post-crisis period.

Driven by the illiquid primary and secondary ABS market, banks started to post their tranches

to the ECB operations. As a consequence, in the post-crisis environment the market for

securitized products has undergone significant changes not only in terms of structural

composition of the market, but also in terms of retained-placed deals. The effect on the ABS

market from such operations was significant. Approximately up to 95% of the ABS issued in

2008 was retained on the balance sheet of the banks, which before the crisis could easily place

them as market transactions. Such a high retention rate is explained by the ECB-driven

demand for ABS deals. Hit by the crisis, traditional channels of financing for banks, such as

the debt market, were shut down (ECB, 2011). Banks had to find alternative ways to raise

financing, which are more reliant on underlying collateral, rather than on market conditions.

Although the retention rate remains still high, in the period of 2010-2011 the situation with

the ABS placement improved. In 2010 and 2011 the market transactions amounted to 23%

and 24% of the issued securitized products, respectively.

Gorton and Metrick26

suggest a run in the repo market as a fundamental reason for

the ongoing crisis in the US; contrarily, repo operations with the ECB became a solution for

the crisis dilemma in the EU.

Throughout the crisis the ECB had to coordinate and regulate the volumes of

available liquidity via a wide variety of financial tools, such as the differentiation of haircuts,

credit quality of collateral and the transparency initiative. It suggests that repo operations with

the ECB were viewed by many banks as the main refinancing instrument during the crisis. In

the period 2007-2008 the ECB relaxed the eligible criteria for many debt instruments, in

particular, for low-quality securities, including ABS, which could not meet the market

standards. The basic rationale for such a strategy, the so-called quantitative easing, was to

provide banks with sufficient liquidity for distressed bonds27

. As a result, the ECB’s balance

sheet was seriously imbalanced by the influx of illiquid assets, endangering its future ability

to generate liquidity for the financial system. Since 2009 the ECB has started to implement

the policy of enhanced credit requirements for banks. Among measures aimed at restoring

26

Gorton, G., Metrick, A. (2009). Securitized Banking and the Run on Repo. Yale ICF Working Paper, No. 09. 27

Gabor, D., (2012). The Power of Collateral: the ECB and Bank Funding Strategies in Crisis. Retrived from: http://ssrn.com/abstract=2062315.

17

market-based principles, is an introduction of haircuts as a protection against market

volatility, enhanced thresholds for ABS in terms of credit quality, and a willingness to provide

the market with extra transparency through the loan-level initiative.

Why has the ECB partly become a main liquidity provider to the majority of banks in

the Eurozone? Part of the answer lies within the disrupted functioning of the interbank

market, which under normal macroeconomic conditions serves as a refinancing source and a

determinant of the real refinancing costs for banks28

. But the crisis has shut down the

traditional ways of raising finance. Moreover, being aware of the information asymmetry of

the risks, to which counterparties were exposed, banks suspended their lending activities in

the interbank market. Given the high level of uncertainty during the crisis, banks were forced

to apply for the liquidity from the ECB, especially, when it comes to such a distressed

segment as the ABS, which tended to be practically illiquid at the end of 2007 and at the

beginning of 2008. Another part of the answer lies within the phenomenon that in times of a

crisis covered funding is gaining popularity among financial market participants, since the

quality of collateral becomes the insurance against higher levels of the market and credit

risks. Sovereign spreads pose a serious hindrance for the uncovered debt issuance; therefore,

for the times of crisis asset backed sources of refinancing and funding with high quality of

collateral, including ECB’s repo operations, come to the forefront.

CHANGES OF REGULATION OF THE ABS MARKET IN THE POST-

CRISIS PERIOD

The new regulatory environment created in response to the pre-crisis under

regulation poses a primary threat for the entire ABS sector. CRD II, CRD IV / Basel III and

the ECB requirements for repo operations provide some challenges for the further

development of ABS markets in the EU.As banks constitute the core investing group, the

biggest part of the new regulation covers the issues associated with the banks’ role in the ABS

market (Barclays Capitals, 2011).

At the heart of bank regulation are CRD II (Article 122a) and CRD IV, which are

going to be implemented in the coming years. In accordance with the Article 122a, originators

are obliged to retain on their balance a 5% slice of issued ABS (Directive 2009/111/EC).

28

Klee, E., Stebunov, V. (2011). A Target Treasury General Collateral Repo Rate: Is a Target Repo Rate a Viable Alternative to the Target Federal Funds Rate? Board of Governors of the Federal Reserve System. Retrived from: http://www.ecb.int/events/conferences/shared/pdf/ pocrides_opfram/Stebunovs.pdf?6c811160855ce633e9382d694601d532.

18

The main rationale behind this decision hinges on the alignment of incentives

between issuers and investors. Banks also have to fulfill some specific requirements in terms

of due diligence. Additionally, provisions of Basel III, reflected in CRD IV, are aimed to

regulate not only bank capital, but also to match its long- and short-term liquidity.

Taking into consideration the fact that ABS were referred to as the least liquid group

of assets regardless of their quality, bank demand for ABS is supposed to be substantially

restrained. The afore-mentioned initiatives on behalf of regulatory authorities could slow

down ABS market development. They could significantly increase the costs of securitization.

Looking at the new legal framework and the composition of the ABS market in the

EU, it is likely that nonfinancial corporates are the only market participants who can preserve

securitization as a funding source. In contrast, a new regulatory approach for the European

banks could deter them from issuing securitized products and from investing in ABS.

In addition, it is worth noting that some investors are banned from entering the

securitization market. For instance, money market funds are prohibited from investing in ABS

since the middle of 2011 by “CESR Guidelines on a common definition of European money

market funds” (CESR/10-049).29

CONCLUSIONS

The financial crisis has seriously undermined the reputation of securitization as a

funding tool for a wide range of assets. As Barclays Capital and Teplova suggest, market

activity in the ABS segments can be observed in RMBS (residential mortgage-backed

securities) and autoABS subsectors30

. Moreover, after the crisis the ABS market is

characterized by a contraction in terms of volume.

Securitization deals as a fast way to improve balance sheet figures is likely to be less

prevalent in the future compared to the pre-crisis period. Incentives and key players in the

ABS market have been altered due to the global financial crisis. It could be expected that

banks will remain the main originators and investors, however, corporations may become a

29

S. Kozak, O. Teplova, Securitization as a tool of bank liquidity and Funding management before and after the

crisis: the case of the EU, Financial Internet Quarterly „e-Finanse” 2012, vol. 8, nr 4

30 Barclays Capital. European Securitization Outlook 2011: The Moment of Truth. Available at:

www.markit.com. 2011; Teplova, O. The Impact of the Global Financial Crisis on the Process of

Transformation of the Asset-backed Securities Market in the EU (the case of Germany). Dissertation at St.

Petersburg State University of Economics and Finance, St. Petersburg, Russia, 2012

19

growing participant in the securitization market. They are supposed to use securitization as

one of the funding instruments.

The rehabilitation of private securitization markets has emerged as a key area of

focus for policymakers. When operating efficiently, securitization supports economic growth

and financial stability by enabling issuers and investors to diversify and manage risk. By

transforming a pool of illiquid assets into tradable securities, securitization frees up bank

capital, allowing banks to extend new credit to the real economy, and supports the

transmission of monetary policy. However, securitization has the capacity to amplify the flow

of credit inside or outside the banking system, increase leverage, exacerbate misaligned

incentives in the financial intermediation chain, and, thus, ultimately amplify systemic risk.

Therefore, strong reasons exist to make the asset class as simple, transparent, and robust as

possible.

Placing private securitization markets back on a firm and sustainable footing has

never been more important. Financial risk-taking has resurfaced, but securitization has yet to

retake its instrumental role in rekindling credit flows and diversifying risks. Clearly,

securitization must be managed in a way that supports financial stability rather than posing

risks to it. Many reforms have focused on mitigating these risks. They need to be

complemented by further policy actions to secure a thriving financial ecosystem for

securitization.

Proposed reforms should be strengthened. First, the quality of underlying loan

origination practices should be further beefed up to restore the appetite for securitization.

Second, securitization intermediaries must be encouraged to develop structures that are

transparent, straightforward to value, and primarily designed to finance the real economy.

Legal ambiguities related to the rights and obligations of servicers, trustees, and investors

should be avoided. Establishing the secure, transparent, and cost-effective transfer of claims

on collateral will be paramount. Third, credit ratings can be put to better use. Standardized

definitions of securitization characteristics and full disclosure of the rating process would

increase transparency and confidence. The practice of rating shopping should be disclosed and

the removal of references to external ratings in regulations accelerated. Fourth, investors can

be galvanized by ensuring consistent application of capital charges across asset classes and

borders. It will be beneficial to avoid large step-changes in charges (the so-called “cliff

effects”) between classes of securitized assets that do not differ much in underlying quality.

More granular application of industry standards for the classification of risk would

preserve the benefits of those standards while mitigating due diligence problems encountered

during the crisis. A single aggregate label for risk tends to act as a credit rating, encouraging

investors to shirk on their due diligence. Changes in the rating can create forced buying and

selling pressure independent of the variation in investor tolerances for risk. Proposals for a

binary (high-low quality) aggregate classification system risk creating a fragmented market

with significant pricing discontinuities. Instead, standardization across individual risk factors

(i.e., duration, prepayment risk, collateral fungibility, track record of credit performance, etc.)

could mitigate these concerns.

20

Finally, securitization markets would be strengthened by fostering a diversified

nonbank institutional investor base with a long time horizon. In the case of Europe, for

instance, the development of a suitable nonbank investor base will likely require the pan-

European harmonization of loan-level reporting standards, documentation standards,

insolvency regimes, and taxation treatment of securitizations. Regulatory, institutional, and

product design obstacles will also need to be overcome to encourage greater sponsorship from

European insurers and pension funds, both of which are underutilized potential sources of

patient, long-term capital. These efforts could also contribute to the broader aim of

diversifying the sources of financing for the European economy.

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