Austrian SME move hits a nerve, ABS stifling riles
Plans for legislative covered bonds backed by SME loans in Austria met with scepticism at an ICMA CBIC & The Covered Bond Report conference yesterday (Thursday), with concerns aired about using a wider range of assets as cover as well as a stifling of securitisation.
Martin Schweitzer, head of strategic solutions, Erste Group Bank, and chairman of the Pfandbrief & Covered Bond Forum Austria, told delegates that changes are being made to the covered bond framework in Austria such as amalgamating three prevailing laws into one and adding provisions for transparency, and that there are plans to introduce a legislative covered bond backed by loans to small and medium sized enterprises (SMEs).
A draft law is set to be tabled in the next couple of weeks, he said, placing the initiative in the context of the important role played by SMEs in Austria and political calls for SME financing.
“Austria is a big SME securitisation country so maybe we can get the ball rolling on SME covered bonds,” he said.
The introduction of such a product, however, particularly in a covered bond context, was received critically by other panellists and delegates, with comments ranging from fairly innocuous doubts as to whether the debt would appeal to traditional covered bond investors to criticisms of what was referred to as a “tranching” of banks’ balance sheets for use as covered bond collateral from one investor.
The idea also prompted criticism of the political stifling of securitisation markets at the same time that banks are being pressured to lend to SMEs.
Arjan Verbeek, ABS and covered bonds at BNP Paribas, said that in the absence of an investor base for asset backed securities being allowed to develop banks have no option but to cut back on lending or “pack the stuff into covered bonds”.
Picking up on a comment made by Christian Moor, policy advisor, securitisation and covered bonds at the European Banking Authority (EBA), but speaking in a personal capacity, on the EBA’s wish that banks have a range of funding tools to turn to, Verbeek said that it is important for securitisation markets to be allowed to grow and that a focus on different assets in covered bonds was the result of political pressure.
But, referring to amendments to the UK Regulated Covered Bond (RCB) regime made in November, he said he was therefore disappointed that the UK authorities excluded securitisation as eligible assets for covered bonds, when the UK is the biggest securitisation market.
Stephanie Tetu, technical specialist at the UK FSA with responsibility for the oversight of the RCB regime, said that the securitisations were excluded not because they were viewed as “bad” but to address the risk of a blurring of the distinction between covered bonds and securitisation, and that this was also why issuers were given the option to declare that their covered bonds are backed by cover pools containing a single type of asset.
Regulations such as Solvency II were cited by panellists as contributing to moves such as the SME-backed covered bond initiative in Austria, with the role played by preferential risk weightings to SME loans also coming up for discussion.
Fitch recently said that the European securitisation market will be “hit hard” by Solvency II, a new regulatory framework for European insurance companies.
“Banks that use securitisations could see the availability of funding for their retail SME assets decrease significantly at a time when they are under pressure to support these sectors while at the same time reducing leverage,” it said.
Schweitzer also referred to “penalties” for SME ABS in Solvency II, and in response to some of the aforementioned comments explained that the SME covered bond initiative is driven by reverse enquiry from Austrian insurance companies, with a certain level of political support being lent to the project given SMEs’ contribution to GDP. The product would initially be targeted at the domestic investor base, he said.
Andreas Denger, senior portfolio manager at MEAG and vice chairman of the ICMA Covered Bond Investor Council (CBIC), questioned the desirability of referring to the Austrian SME backed funding tool as a covered bond, suggesting that while he is not against the product it should be referred to differently, in particular if it not a product that will appeal to traditional covered bond investors.
Verbeek said that it should be called a securitisation but that this is not possible because “politicians say it’s bad”, while Schweitzer was happy to reassure that the matter was being dealt with in a “typical Austrian way” and that – unlike public sector and mortgage backed covered bonds in Austria – the funding tool would not be called a Pfandbrief.