In conversation: Bernd Loewen
The KfW Executive Board on the planned reform of the EU securitisation rules, appropriate capital requirements and data mining
KfW board member Bernd Loewen is pushing for an “intelligent further development” of the EU rules on securitization. In response to the financial crisis, the EU deliberately over-regulated, for example with regard to transparency requirements and capital adequacy. Loewen’s demand is therefore that securitization should no longer be over-regulated compared to other financial instruments!
By Detlef Fechtner, Frankfurt
In the spring, Europe’s finance ministers and heads of government explicitly called for adjustments to EU rules in order to revive the securitization market. This makes Bernd Loewen, a member of the board of the KfW banking group, confident that an “intelligent further development of the rules” can succeed. It is important that this plan is not watered down in the course of the legislative process. “Because: A major breakthrough must be achieved,” Loewen stressed in an interview with the Börsen-Zeitung.
A revitalization of the securitization market is urgently needed to give banks new scope for lending. Synthetic transactions, for example, enable banks to release equity. This is important because banks often do not lack liquidity. Often the bottleneck is equity, explains Loewen. In synthetic securitization, risks are placed, not loans placed. The loans therefore remain on the balance sheet, and there is no reduction in the balance sheet. “But by placing the risks, an institution can sign more loans with a given capital base,” emphasizes the KfW board member.
Scalable, proven, regulated
Loewen is convinced that there is no more suitable instrument for building a bridge between bank-based corporate financing and the capital market than securitization. “Nothing is more scalable, proven, regulated.” And given the huge volumes required for the transformation, as well as the possibility of involving investors in the risks to the desired extent, securitization is “the instrument of choice.” “If institutional investors are convinced of the granularity and quality of the pool, then they will be happy to invest in securitization, especially in uncertain times.” This is because these investments reduce concentration risks and are therefore attractive to institutional investors from the point of view of risk diversification.
Looking back, Loewen criticizes: “Under the impact of the financial crisis, European securitization was wrongly penalized.” In his opinion, the “subprime” issue was exclusively an American one. The default rates for residential real estate securitization were between 3% and 15% in the USA, and less than 1% in Europe. Despite this, EU regulation was “deliberately over-stated” in terms of documentation, data delivery and transparency requirements as well as capital backing. “The request to EU legislators is: no longer over-regulate securitization compared to other financial instruments!”
He is hopeful that in Germany, for the first time, there is a broad consensus between politicians, the government and the financial industry. “However, there are still reservations in this country not only about securitization, but also about the capital markets as such,” observes Loewen.
Specifically, Loewen draws the following conclusions: The capital requirement follows the so-called non-neutrality principle. This means that the capital requirement was deliberately designed in such a way that the total capital requirement for the individual tranches is more than what banks have to provide for the loan portfolio on a bank balance sheet – even though the loans are the same. The reason behind this is the concern that investors probably don’t know exactly what the loan portfolio consists of. “But this assumption cannot be empirically proven,” says Loewen. It is even refuted by the low default history in Europe. Against this background, capital requirements should be based on the risk content in the future.
High effort in due diligence
As far as due diligence is concerned, Loewen reminds us that STS securitizations – whether true sale or synthetic – are verified by two institutions that have been approved by the supervisory authority, namely SVI and PCS. Investors would still have to demonstrate a very complex due diligence process even for verified products, which is associated with redundancies and is not proportionate to the knowledge gained. This unnecessarily reduces the circle of potential investors.
“We now have good experience of which of the required data has actually been accessed by supervisory authorities or investors,” Loewen emphasizes. When it comes to information that has to be compiled in accordance with regulatory requirements but which no one then uses, the question arises as to whether this makes sense: “Nobody needs data repositories.”
Platforms are a way for smaller institutions to use the instrument of securitization effectively. “If platforms were created to bundle loans and securitizations of smaller savings banks and cooperative banks, we could possibly imagine acting as an anchor investor in the initial phase to build trust,” announced the KfW board member. Provided, of course, that such a platform had a regular minimum issue volume in addition to the quality of the loans. The idea behind this is to send a signal to the market if it is clear “that we are prepared to invest in these new issues.”
KfW has always been a supporter of the securitization markets. It is no coincidence that KfW has successfully operated the securitization platforms “Promise” and “Provide”. “We are convinced of these instruments.” “Of our entire portfolio of around EUR 35 billion, we invest a relatively stable 20% in securitization structures because we value the asset class in terms of return/risk aspects,” reports Loewen.
