The ECB, working with the European Investment Bank and the European Commission, has decided that securitization is the best way to help SMEs transit from their traditional reliance on bank funding to the capital markets, which most are too small to tap directly.

But the securitization market in Europe has withered and investors have all but abandoned higher-rated senior tranches, discouraged by a lack of paper offering an acceptable yield. Bank regulators have been wary of letting banks count high-rated asset-backed securities in their liquidity buffers, so damning them as illiquid in the eyes of investors.

The European insurance and occupational pensions authority looks likely to set high capital charges for non-bank investors in ABS, such as insurance companies, based on the high volatility these instruments showed through the sub-prime crisis. In this, it follows Basle regulators, which have imposed extreme capital charges on originators’ retained exposure of unrated risk – so removing a key incentive for banks to securitize for capital relief – while not recognizing risk offsets for senior tranches through portfolio diversification or protection from junior holders taking risk at lower attachment points.

Executive board member of the European Central Bank Yves Mersch now characterizes this as an over-reaction based on misconceptions about ABS and says that calibrating regulation for the entire market based on US sub-prime is like calibrating the price of flood insurance on the experience of New Orleans and applying it to Madrid.

Madrid, of course, stands 2,000 feet above sea level. Do plain-vanilla, high-quality ABS stand at a similar remove from the US junk that poisoned banking systems on both sides of the Atlantic five years ago? It might be that they do and that the excessive regulation imposed on the ABS market will in years to come be a textbook study of the damaging unintended consequences of a regulatory response that hobbled a vital link from the capital markets to the real economy.

It’s not too late to act.

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"Draghi suddenly was making the same case in defence that every participant in the securitization market has been making to deaf ears since the beginning of the sub-prime crisis: namely, that it is a tool that is neither inherently good nor bad, but that can be put to good or bad uses, and that to say because some securitizations turned toxic all securitizations should be discouraged is like saying that because some loans turn sour, all lending should be reduced"

Weak loan demand is the real problem, say banks

Euromoney December 2013

In November, the European Central Bank published the findings of its latest survey of SMEs in the euro area. It contacted over 8,000 firms, the vast majority with fewer than 250 employees, and concluded with the headline that the dominant concerns for these companies was finding customers and access to finance. 

Bankers question merits of EIB’s SME solution

Euromoney December 2013

Europe’s policymakers hope a new programme to facilitate securitization will help set free lending to small and medium-sized enterprises. But ABS specialists doubt the initiative will work – and if it is needed at all.

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Euromoney December 2013

Convinced that reviving the moribund securitization market is the best way to channel funding to small and medium size enterprises, the ECB is now championing the financial technique at the centre of the systemic collapse five years ago. Convinced any U-turn is justified to support the small companies that might drive Europe's economic recovery, the ECB now finds itself at war with regulators still determined to clamp down hard on securitization.