Cette semaine, le chef économiste de BGL BNP Paribas revient – en anglais dans le texte – sur l’utilité des valeurs immobilières adossées à des actifs (ABS).
ABS: part of the problem or part of the solution?
With ECB President Mario Draghi’s recent comments at the World Economic Forum in Davos, asset backed securities (ABS) are back on the agenda. The idea that reviving the ABS market could help to unlock the credit flow to small and medium sized enterprises (SMEs) has raised some eyebrows as some of these very same securities have been widely blamed for triggering the recent financial crisis. So how might ABS help?
It may be useful to start with a few general points. ABS are the product of a process referred to as securitization. The basic idea is simple but powerful: by pooling a large number of mortgages (or other assets) and then dividing them into tranches with different seniority, one can create tradable securities with a different credit risk from the underlying mortgages. In particular the senior tranche has a lower probability of default while the junior tranche has a higher probability of default than the underlying pool. Simple “first generation” ABS of which mortgage backed securities (MBS) are a prominent example have in fact been used extensively since the 1980s, particularly in the United States. The problems in 2007-08 were concentrated in MBS based on subprime mortgages as well as more esoteric “second generation” collateralized debt obligations (CDO) where a second (and sometimes third) round of tranching was applied to existing tranches of ABS.
ABS may offer a solution to the slowdown in credit to SMEs in the euro zone. In countries such as Italy, Spain or Portugal there has indeed been a significant credit contraction, characterized by fewer loans and relatively high interest rates on those loans which are made. While some of this contraction is due to lower demand, some of it is due to lower supply by the banks. This is not surprising given that many banks have been deleveraging their balance sheets and strengthening their capital and liquidity ratios in preparation of the pending Asset Quality Review (AQR) and more broadly the upcoming regulatory requirements under Basel III.
Reviving the market for ABS would allow transforming non-tradable and often risky loans to SMEs into tradable securities, some of which could be made safer than the underlying loans. This could allow institutional investors who are required to only hold securities of high credit quality to invest and share some of the credit risk at a level that is appropriate for them. This in turn would reduce bank balance sheets, free up capital and increase the supply of credit. Banks could signal their commitment to loan selection and monitoring standards by keeping “skin in the game”, i.e., by holding on to some of the tranches with the highest credit risk.
Simple and transparent ABS are a powerful tool for allocating credit risk to those who are best placed to bear it and thereby represent an opportunity to strengthen the credit flow to SMEs in the euro zone.