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Editor’s blogDecember 4 2014

Common sense prevails in securitisation thinking

The rethinking of the role of securitisation by regulators is a sensible and welcome development for an area that has been unfairly maligned since the onset of the financial crisis.
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The EU's latest €315 infrastructure investment plan relies on government guarantees. This comes on top of last year's situation when the European Investment Bank and the European Investment Fund provided credit enhancement for securitisations of SME loans. In the UK there is a scheme for government guarantees of home loans.

It should be remembered, however, that these initiatives are coming from governments that understandably do not want to use taxpayers' funds to bail out banks. In pursuit of this aim, the regulatory and capital requirements of banks have been made so demanding that they cannot perform all the functions they used to. So governments need to entice them back with financial support even after having promised never to do that again.

To do this makes little sense, although politically it is easier to take a hit on an infrastructure project than to pick up the pieces of a bank. Fortunately in the securitisation space new thinking is under way and there is recognition that maybe the first approach was too blunt.

Between July 2007 and third quarter 2013, the default rate on European structured assets was 1.5%, compared with 18.4% for US structures including subprime. Sensibly, regulators are now recognising the important role securitisation plays in credit creation, and that there are huge differences between the performances of high- and low-quality assets. They are now revisiting this area.

This is a more sensible approach than regulating a market so hard that it then requires a government or agency guarantee to get it going again. Perhaps a review of capital requirements for infrastructure lending should be next.

Brian Caplen is editor of The Banker

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