Collateralising credit claims as securities 1
Collateralisation of credit claims • A convincing business case • Objectives and features of the project • Current status of works • Duplicability of the vehicle 2
Collateralisation of credit claims • A convincing business case • Objectives and features of the project • Current status of works • Duplicability of the vehicle 3
A convincing business case Increasing needs for collateral… Increasing needs for collateral… • • Bank’s existing marketable collateral is already largely used • Liquidity is available but does not circulate under uncovered format • Combined impact on collateral demand of liquidity regulation (LCR) and OTC derivatives reform (EMIR) up to € 4,1 trillion* • Need to revive the interbank market and decrease central banks intermediation …calling for an …calling for an optimisation optimisation of collateral usage of collateral usage • • Development of triparty management services provide answers • Collateral must not be captive of a specific context (domestic) or usage (with NCBs only) • Operational efficiency and interoperability is key for an optimal collateral mobilisation * BIS (2013), Increased demand for collateral assets : implications for markets and policy , CGFS Papers n° 49. 4
A convincing business case Credit claims: a significant part of banks’ balance sheets… Credit claims: a significant part of banks’ balance sheets… • Stable funding source for the euro area economy* : NFCs rely on bank loans for 40% of their financing needs in the euro area (for less than 10% in the US) • Especially for SMEs as 25% of MFI loans smaller than € 250,000 • Share of MFI lending to NFCs in total MFI assets in FR and DE : 10% ; IT and ES : 20% … but remain an underused source of collateral … but remain an underused source of collateral • Use of credit claims as collateral essentially with central banks and on a domestic • Close to nil on cross-border basis and interbank market • Underused source of collateral due to legal impediments and operational constraints *ECB(2013), The use of credit claims as collateral for Eurosystem credit operations , Occasional Papers n° 148. 5
A convincing business case The market calls for the The market calls for the securitisation securitisation of credit claims of credit claims • Clear and unambiguous market support • Strong commitment from the sponsor banks • Strong support from international banks • Interest from European market associations • Clear interest expressed by investors In line with In line with several public policy several public policy objectives objectives • The securitization of credit claims will contribute to • finance the real economic sphere, especially SMEs • increase the available amount collateral on the interbank market • revive the interbank market / decrease dependency on central banks • reduce dependency towards rating agencies 6
Collateralisation of credit claims • A convincing business case • Objectives and features of the project • Current status of works • Duplicability of the vehicle 7
Objectives and features A simple and transparent instrument
Objectives and features Detailed collateralisation process used in France Credit claims (CC) mobilisation technique using the Collateral Directive (transposed in France via the Financial Guarantee - article L211-38 of the French Monetary and Financial Code) 1 A subsidiary (from the same group as the sponsor 1 bank) grants a loan – the underlying CC - to a borrower (corporate). Underlying CC Borrower Sponsor bank (SME) € Pledge (Financial Collateralized 2 € Underlying CC are assigned to an intermediary bank as Guarantee loan L211-38) 2 security interest by the sponsor bank as a guarantee to a collateralized loan provided by this intermediary bank to the originator according to the L211-38 article Intermediary of the French Code Monétaire et Financier. In Bank (used to exchange, the sponsor bank receives cash. transfer the collateralized loan) Assignment of loan receivables & 3 The collateralized loan is sold by the intermediary € transfer of the 3 bank to the SPV’s relevant compartment and the Financial Guarantee L214-43 underlying CC are assigned as security interest to this SPV’s relevant compartment at the same time. In exchange, the intermediate bank receives cash. After SPV € selling the loan, the intermediary bank is no longer Collatera Compartment Investor involvedin the transaction. lized Securities Securities sponsor bank loan The sponsor bank compartment in the SPV issues 4 Compartment bank x 4 securities backed by the collateralized loan and receives cash in exchange. Compartment bank y
Objectives and features French project features • Common issuance structure and documentation for all sponsor banks Simple set- Simple set • Each bank has its own compartment(s) up up • Mutualized setting-up costs • Very transparent structure • Eligible credit claims only, assessed via NCB ICAS or banks IRB Risk control Risk control • Asset manager and depository, compliant with securities regulation measures measures • Full segregation of risks among sponsor banks • Double-recourse for bond holders Flexibility Flexibility • Alignment of security characteristics with those of the underlying collateral • Dynamic portfolio of credit claims modifiable twice a week to allow short and and term loans and cope with prepayment risk efficiency efficiency • Issuance parameters under control of each sponsor bank 10
Objectives and features French project features Based on a very transparent and simple (no tranching) structure Robust and risk-adverse Replicable in different jurisdictions Designed to embed risk management measures Cost-efficiency and scalability 11
Collateralisation of credit claims • A convincing business case • Objectives and features of the project • Current status of works • Duplicability of the vehicle 12
Current status of works Project calendar From From concept concept 2012 - Initiative from High Level Market Place Committee Q1-Q2/2013 – Feasibility study groups June 2013 – Finalisation of the project blueprint To reality To reality To reality To reality - Q3/2013 - Project launched by six major international banks - Oct.2013 - Selection of the providers – pre-operational phase Currently Currently Currently Currently Q1/2014 - Set up fo the structure - First securities issuances 13
Current status of works Market Place project and eligibility assessment in parallel Market Place project Eligibility assessment • Banking community’s clear commitment and supportive role of Banque de France • Banks’ requests for eligibility of the securities as collateral • Project is now in its pre-operational phase • Eurosystem’s analysis • Structure to be set up by Q1/2014 for the first issuance 14
Collateralisation of credit claims • A convincing business case • Objectives and features of the project • Current status of works • Duplicability of the vehicle 15
Duplicability across Europe The business case goes beyond French borders The business case goes beyond French borders • Increasing collateral needs of the overall banking community • The initiative relies on a common Eurosystem collateral class (credit claims) • Securitisation can be very instrumental in jurisdictions where credit claims mobilisationis facing operational constraints Market support is international Market support is international • Interest from European market associations (ECBC, ERC) • Support from international banks and collateral management services providers • Interest from international investors Duplication in Duplication in different different jurisdictions jurisdictions • Lies on common legal basis stemming from European Directives, subject to local adaptations • Facilitatedby a very simple and transparent structure • Can capitalise on existing or future facilitiesand infrastructures 16
Conclusion • Project featured by an obvious market need a clear market support positive externalities • The business case goes across borders • Current request for collateral eligibility 17
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