Securitisation in Europe
Securitisation is a mechanism through which specific, illiquid financial assets are converted into tradeable securities on capital markets. This mechanism is increasingly gaining momentum and has become a widespread commercial financing method worldwide.
Europe is at the forefront of this trend, where the continuous growth and expansion of securitisation markets generate significant benefits and strong returns for issuers, investments, securities dealers, as well as national and public governments. However, members of the European Securitisation Forum believe that, given the steady growth and expansion of European securitisation markets, substantial progress and improvements must be made regarding transaction reporting.
In this document, the term “transaction reporting” refers to the post-issuance calculation and periodic distribution (typically monthly) of performance reports for securitisation transactions. Such transaction reporting is generally subdivided into two parts:
- Information at the underlying portfolio level, regarding the characteristics and performance of the receivables and other financial assets that serve as the source of payments derived from the securitisation transactions.
- Information at the security level itself, regarding the allocation and distribution of these cash flows to the holders of the different tranches of securities, in accordance with their payment priorities and characteristics.
Securitisation market participants rely on transaction reporting as their primary source of information to analyze, price, trade, and settle Mortgage-Backed Securities (MBS) and Asset-Backed Securities (ABS) on both primary and secondary markets. As such, transaction reporting can be likened to periodic financial reporting provided to the market by traditional equity and debt-issuing corporations.
Just as recent earnings results are critical to evaluating the value of an entity’s debt or equity securities, transaction reporting is essential for assessing the past performance and future outlook of securitised financial instruments. Investors and traders value the availability and quality of transaction reporting to determine whether and at what level to invest or make markets in these securities. Transaction reporting also provides essential information for the allocation and distribution of principal and interest funds required for the clearing and settlement of securities.
From the Investor's Perspective
From the Banker's Perspective
From an Operational and Business Perspective
The monitoring of credit risks and “credit enhancement” within a securitisation transaction contribute to greater transparency regarding loan quality—a characteristic that was sometimes lacking for depositors and third parties. Indeed, securitisation transactions are often characterized by two types of major innovations: product and process innovations. The first type has given rise to a whole host of new financial products, as it is not limited strictly to mortgages but also covers other types of receivables. The second type implies a profound reorganization of the existing banking system.
In addition to enhancing the aforementioned financing method, securitisation enables banks and financial institutions to remove receivables from their balance sheets (off-balance sheet treatment), which can be highly advantageous, particularly for a bank whose volume of allocated loans reaches a significant level relative to its equity capital. This is achieved by transferring them to the securitisation vehicle, which, in turn, converts them into tradeable securities on the market.
Through this technique, the originating institution can achieve two core objectives: asset restructuring and investing in new mortgage portfolios, while strictly complying with the prudential regulations enacted by the Bank of Algeria. Furthermore, the implementation of a securitisation system primarily aims to mobilize savings to finance real estate investments, and secondarily to stimulate the capital market by converting illiquid assets (receivables) into tradeable market securities.
Another particularly valuable benefit is the refinancing of banks and financial institutions facing long-term liquidity shortages. This technique thus allows financial institutions to rid themselves of the constraint of maturity mismatches between assets and liabilities, while multiplying their financing capacity without having to worry about their equity capital levels. This represents an exceptional leverage effect.
By transferring their receivables, banks and financial institutions are able to restart the cycle to offer further credit to households. However, their role does not end with loan origination, as they continue their management by collecting repayments from debtors (households). Finally, the success of a securitisation transaction depends, among other things, on two conditions: the first is the existence of a high-performing financial sector, and the second is the existence of a primary mortgage market capable of generating large volumes of high-quality, highly standardized mortgages.