Market updates and sector developments

The IACPM says it stands ready to share data and experience on synthetic securitisation with US federal regulators, in order for US banks to share risk in an effective, safe and transparent manner with specialised long-term partners. The move follows recent positions taken in the press or in letters sent to the US agencies, notably by Sheila Bair and Senator Jack Reed, urging the federal regulators to scrutinise the risks associated with synthetic securitisations.

“The goal of the IACPM is to collaboratively work with the US agencies to help build a safe synthetic securitisation market that allows banks to effectively manage their credit portfolios in partnership with professional credit investors and insurers, and in turn support growth in the US economy. These transactions allow banks to safely mitigate risk and reduce their capital requirements, while investors participate in credit risk sharing,” the IACPM notes.

The association cites its decade of gathering experience from longstanding risk-sharing practitioners that demonstrates synthetic risk transfers can be conducted in a safe and sound manner, by risk-sharing partners that fully understand the risks, while adhering to the strict control of banks’ supervisors. In particular, the experience built in Europe over the last decade shows that investors in European risk-sharing transactions are long-term partners of banks and are “fully aware of the risks, run extensive due diligence and stress tests, and close transactions throughout the entire credit cycle”. Furthermore, all credit losses and claims are paid out of the cash posted on day one in a dedicated account.

The IACPM states that two conditions are needed to build a robust risk-sharing process: risk sharing must be effective for banks in terms of amount and cost of capital relief; and transactions must be transparent and executed in line with strict securitisation regulations. This understanding is based on the IACPM and its members working with European regulators and supervisors to share best practices, conduct surveys, understand the impact on capital and define the due diligence, structuring and disclosure features required for effective risk-sharing transactions.

In other news…

Georgia adopts ABS framework based on EU ‘best practices’
The Georgian Parliament has endorsed legislation on securitisation, with the aim of significantly mitigating risks associated with securitisation while enhancing transaction transparency for investors. Specifically, the law aligns with the methodologies of jurisdictions that have mature securitisation markets and incorporates key principles from the prevailing EU securitisation regulations.

In recent years, the country has proactively pursued the establishment of alternative financing avenues for businesses and the introduction of innovative investment instruments to cater to investors. Notably, the Parliament of Georgia enacted the Law on Mortgage Covered Bonds in 2022, governing the issuance of bonds backed by mortgage loans by commercial banks. The implementation of the securitisation mechanism represents a natural progression of this policy and is set to enhance the accessibility of financing for both the financial and non-financial sectors.

The legislation was collaboratively developed under the guidance of the National Bank of Georgia and the Ministry of Economy and Sustainable Development, based on European best practices. Integral to this process was support from the Asian Development Bank, the EBRD and the US Agency for International Development.