Structured Finance Operating Model - Market and Problem Data

Part
01
of five
Part
01

European Securitization Market - Arranger

Having searched the available public sources thoroughly, we find limited data available on the financial institutions which take on the arranger role in the European securitization market. To briefly summarize our findings:

  • Based on awards nominees from GlobalCapital's annual contest, arrangers in Europe are commonly large, multinational banks, many of them based in the US.
  • There is considerable overlap among the banks in the types of assets that they service in; e.g., Bank of America and BNP Paribas have been nominated for the ABS, CRE & CMBS, and RMBS Bank of the Year award. We, therefore, suspect that the majority of financial institutions involved do not specialize in a particular asset type.
  • It is not uncommon for the originator to act as the arranger as well.
  • It is also more common for fund managers to work with arrangers rather than take on the role themselves.
  • There is no comprehensive listing of arrangers from which we can derive a number, possibly due to the overlap with originators.

Research Strategy, Data Points, and Interpretations

After familiarizing ourselves with the roles played by different actors in a securities transaction (a representative sample of our sources can be found here, here, and here), we looked into which banks are operative in these roles in Europe. Note that while this project pertains strictly to the European market, official European sources frequently refer to American resources, indicating that, in most respects, the processes are the same across the pond. Indeed, a report from the European Securitisation Forum notes that "the process of securitisation ... will be similar to a meaningful degree wherever the securitisation concept is applied ... even in different countries, under different legal and regulatory structures." We have, therefore, incorporated those American sources into our research.

In a serendipitous discovery, we found that GlobalCapital holds an annual contest for European Securitization actors. The nominees for Arranging Bank of the Year and winners from the prior year are all large, multinational corporations:

  • Barclays
  • Bank of America
  • BNP Paribas
  • Citi
  • Goldman Sachs
  • Morgan Stanley
  • Merrill Lynch
  • Monte dei Paschi di Siena
  • Deutsche Bank
  • JP Morgan
  • Credit Suisse
  • Mediobanca

We were unable to determine how many arrangers are operative in Europe due to all available sources being paywall-locked (e.g., see GlobalCapital's partial list here).

Despite a thorough search of European financial and government sources, we are unable to locate a public, authoritative source that provides insight into how arrangers are clustered by asset type. Based on award nominations, there is considerable overlap among the banks; e.g., Bank of America and BNP Paribas have been nominated for the ABS, CRE & CMBS, and RMBS Bank of the Year award. Given the overlap and the lack of data in the available sources, a thorough analysis of clusters by asset types cannot be achieved within the scope of a single Wonder request.

Therefore, we will attempt to provide some insight, using FitchRatings' search engine as our proxy source. Isolating the European Structured Finance market, we found 99 deals in which arrangers were notably involved as follows:


Further analysis of these deals and the banks involved, again, cannot be completed within the scope of a single Wonder request, though we deem it likely that further study would yield additional insights.
Part
02
of five
Part
02

European Securitization Market - Problems Quantification

The majority of the discussion of problems in the European Securitization market, particularly those involved in recently-passed regulation, has been qualitative. This is particularly true in the case of the discussions of the problems involved in the amount of data needed to comply with the relevant regulations; in the discussions of the issues located, phrases such as, "asset-level data requirements may be particularly problematic," or, "Other issuers may not have systems in place to reliably capture and provide asset-level data" are the only descriptions of the difficulties involved. We theorize that the difficulties are such that determining the quantitative cost in terms of Euros or man-hours at any level higher than an individual financial institution is extremely difficult.

On the other hand, there several problems are arising from the EU's regulatory framework for which the quantitative cost is well-documented, and we have presented these in our findings below.

Note: The most comprehensive comparison of US and European rules we have located are these lengthy articles by Morgan Lewis and Mayer Brown, and we recommend them for further study.

The Impact of Recent Regulatory Changes

  • The Bank of International Settlement (BIS) announced in January their estimate that the revised internal model approach (IMA) to approaching risk would "result in a weighted average increase of about 22 percent in total market risk capital requirements," though proponents argue that IMA's impact would be "essentially neutral."
  • EU regulations on the liquidity coverage ratio (LCR) allows an expanded range of high-quality liquid assets (HQLA) for certain types of securitization ("SME, auto and consumer loan ABS in addition to RMBS"), but only up to a cap of 15% with "haircuts" of 25-35%. This still gives dominance of the playing field to covered bonds, which can constitute up to 70% of HQLA.

Damage to Innovation

  • The difficulties of the STS are compounded by a requirement to "make available to potential investors, historical data on static and dynamic default and loss performance data of receivables substantially similar to those to be securitized for a minimum period of 5 years." This presents potential problems for originators trying to bring new asset classes to the market, though quantitative data on the ultimate effect will not be available for several years.

Impact on the European Investment Market

  • European banks have found securitization to be increasingly unprofitable and are changing their profiles accordingly; e.g., Credit Suisse recently completed a three-year restructuring effort to shift its focus to wealth management over securitization.
  • While this is attributed to a great extent on European banks' smaller scale and refusal to make major changes, ultra-low interest rates, strict capital requirements, and weak economic growth are also to blame.
Part
03
of five
Part
03

European Securitization Market - Servicer

Having searched the available public sources thoroughly, we find limited data available on the financial institutions which take on the servicer role in the European securitization market. To briefly summarize our findings:

  • In Europe, the originator commonly, though not universally, serves the role of the servicer.
  • Based on award nominations, there is considerable overlap among the banks who operate as originators and, therefore, servicers in terms of what types of assets they service; e.g., Bank of America and BNP Paribas have all been nominated for the ABS, CRE & CMBS, and RMBS Bank of the Year award.
  • The number of servicers in Europe is unknown, possibly due to the extensive overlap with originators and, therefore, arrangers.
  • While the risk is generally held by the sponsor in the US, Europe's rules require that the originator, original lender, or sponsor retains the risk, "and that such risk cannot be split between different types of retaining entities." This means that many servicers will bear the risk due to also being the originator.

Research Strategy, Data Points, and Interpretations

After familiarizing ourselves with the roles played by different actors in a securities transaction (a representative sample of our sources can be found here, here, and here), we looked into which banks are operative in these roles in Europe. Note that while this project pertains strictly to the European market, official European sources frequently refer to American resources, indicating that, in most respects, the processes are the same across the pond. Indeed, a report from the European Securitisation Forum notes that "the process of securitisation ... will be similar to a meaningful degree wherever the securitisation concept is applied ... even in different countries, under different legal and regulatory structures." We have, therefore, incorporated those American sources into our research.

Servicers, which perform "a number of administrative duties on behalf of the SSPE — mailing billing statements, collecting payments and servicing delinquencies — to collect payment on the assets." In Europe, this role is often performed by the originator. In a serendipitous discovery, we found that GlobalCapital holds an annual contest for European Securitization actors and, in an article on the 2018 winners, found that the Securitization Bank of the Year award encompasses banks with a deep commitment to multiple levels of the securitization process, including though not restricted to origination.

Thus, based on the award nominees for 2020, a likely list of servicing banks would include many of the multinational financial institutions:

  • BNP Paribas
  • Bank of America
  • Citi
  • HSBC Lloyds
  • Deutsche Bank
  • Goldman Sachs
  • Morgan Stanley

Despite a thorough search of European financial and government sources, we are unable to locate a public, authoritative source that provides insight into how arrangers are clustered by asset type. Based on award nominations, there is considerable overlap among the banks; e.g., Bank of America and BNP Paribas have been nominated for the ABS, CRE & CMBS, and RMBS Bank of the Year award. Given the overlap and the lack of data in the available sources and the overlap between servicers, originators, and arrangers (see our related brief), a thorough analysis of clusters is not possible based on information currently within the public domain.

Therefore, we will attempt to provide some insights, using FitchRatings' search engine as our proxy source. Isolating the European Structured Finance market, we found 741 deals in the last two years in which servicers were notably involved as follows:


Further analysis of these deals and the banks involved cannot be completed within the scope of a single Wonder request, though we deem it likely that further study would yield additional insights.

As a final note, one important distinction we found between the US and European securitization markets is that in the US, the risk is generally held by the sponsor while Europe's rules require that the originator, original lender, or sponsor retains the risk, "and that such risk cannot be split between different types of retaining entities." Given that the originator and servicer are often the same entity in Europe, we found this notable enough to include here.
Part
04
of five
Part
04

European Securitization Market - Trustee

Having searched the available public sources thoroughly, we find limited data available on the financial institutions which take on the trustee role in the European securitization market. To briefly summarize our findings:

  • Trustees to securitization deals are "usually a professional corporate trustee," though in Europe the role is also often filled by medium to large-sized banks.
  • Not all European jurisdictions recognize the trust concept; who becomes the rights-holder then varies by country.
  • Apart from this, we find no data on how often professional corporate trustees are retained vs. how often it falls to a bank, nor on whether this changes depending on the type of asset. Given that not all European countries even recognize the trust concept, we suspect that a country-by-country study would need to be conducted to learn more.
  • We are likewise unable to determine the number of professional corporate trustees in Europe; again, we suspect that different local laws may obscure this detail.

Research Strategy, Data Points, and Interpretations

After familiarizing ourselves with the roles played by different actors in a securities transaction (a representative sample of our sources can be found here, here, and here), we looked into which banks are operative in these roles in Europe. Note that while this project pertains strictly to the European market, official European sources frequently refer to American resources, indicating that, in most respects, the processes are the same across the pond. Indeed, a report from the European Securitisation Forum notes that "the process of securitisation ... will be similar to a meaningful degree wherever the securitisation concept is applied ... even in different countries, under different legal and regulatory structures." We have, therefore, incorporated those American sources into our research.

In a serendipitous discovery, we found that GlobalCapital holds an annual contest for European Securitization actors. The nominees for Trustee of the Year are:

  • BNY Mellon
  • Citibank
  • HSBC Securities Services
  • US Bank
  • InterTrust

The large size and international reach of the above examples correspond with one of our background sources, which notes that trustees are "usually a professional corporate trustee." However, not all European jurisdictions recognize the trust concept; who becomes the rights-holder in these cases varies by country.

Despite a thorough search of European financial and government sources, we are unable to locate a public, authoritative source that provides insight into how arrangers are clustered by asset type. Where different asset types are discussed, the information is focused on how this changes the role of the trustee, not on how it changes who is likely to be the trustee.

Therefore, we will attempt to provide some insight, using FitchRatings' search engine as our proxy source. Isolating the European Structured Finance market, we found 225 deals in the last two years in which servicers were notably involved as follows:


Further analysis of these deals and the banks involved, again, cannot be completed within the scope of a single Wonder request, though we deem it likely that further study would yield additional insights.
Part
05
of five
Part
05

European Securitization Market - Investor

Having searched the available public sources thoroughly, we find limited data available on the financial institutions which take on the investor role in the European securitization market, though there is more data on this role than on many others. To briefly summarize our findings:

  • ABS market participation in Europe is composed of approximately 40% asset managers, 30% banks, and 20% central banks, with the remaining 10% comprising pension funds and others.
    • Asset types serviced seem more dependent on location than the type of financial institution; e.g., Luxembourg's securitization is 43% loans while Ireland and Italy are 63% and 80%, respectively.
    • Location also affects market participation. In the UK, for example, asset managers comprise nearly 70% of the market participants and there is virtually no participation by central banks, pension funds, or others.
    • We were unable to locate similar data broken down by securitization roles or other asset types; however, there is considerable overlap among the banks in which types of assets they will invest in; e.g., Bank of America and BNP Paribas have all been nominated for the ABS, CRE & CMBS, and RMBS Bank of the Year award.
  • Crunchbase lists 52 "top" investment banks with investments in Europe; we are unable to determine how many smaller, local banks are also involved.
  • The banks involved in securitization investments tend to be smaller institutions than found in other roles; this may be due to Europe's regulatory environment or stagnation in investment among larger banks, which also seems to deter investment by US banks.

Additional context, findings, and interpretations may be found in our research strategy below.

Research Strategy

After familiarizing ourselves with the roles played by different actors in a securities transaction (a representative sample of our sources can be found here, here, and here), we looked into which banks are operative in these roles in Europe. Note that while this project pertains strictly to the European market, official European sources frequently refer to American resources, indicating that, in most respects, the processes are the same across the pond. Indeed, a report from the European Securitisation Forum notes that "the process of securitisation ... will be similar to a meaningful degree wherever the securitisation concept is applied ... even in different countries, under different legal and regulatory structures." We have, therefore, incorporated those American sources into our research.

In a serendipitous discovery, we found that GlobalCapital holds an annual contest for European Securitization actors. The most recent nominees for top investors, both senior and junior, are:

  • BlackRock
  • European Central Bank
  • Insight
  • Pimco
  • Standard Chartered
  • Davidson Kempner Capital Management
  • East Lodge Capital Management
  • M&G
  • SPF Investment Management
  • TwentyFour Asset Management

Altogether, Crunchbase lists 52 "top" investment banks with investments in Europe; we are unable to determine how many smaller, local banks are also involved in this capacity from sources in the public domain.

The banks listed above are consistent with Deloitte's statement that typical investors in securities are "institutional investors such as pension funds, insurance companies, alternative asset managers, investment funds, and banks," who desire a higher rate of return than is available through other assets. However, the lack of larger European banks or even US banks operating in Europe, which we see in other securitization roles, is striking. According to a recent CNN story, several factors, including problems of scale, regulation, and inertia, are causing European banks to stagnate in their investment roles and the slow recovery from 2008's crash may be deterring US multinational banks from significantly investing in European securities, though they operate in other roles. Thus, this investor role seems to be gravitating towards smaller financial institutions.

Despite a thorough search of European financial and government sources, we are unable to locate a public, authoritative source that provides insight into how arrangers are clustered by securitized asset type. Based on award nominations, there is considerable overlap among the banks; e.g., Bank of America and BNP Paribas have been nominated for the ABS, CRE & CMBS, and RMBS Bank of the Year award. Given the overlap and the lack of data in the available sources, a thorough analysis of clusters by asset types cannot be achieved within the scope of a single Wonder request.

Therefore, we will attempt to provide an estimate, using FitchRatings' search engine as our proxy source. Isolating the European Structured Finance market, we found 1,856 deals in which investors were notably involved as follows:


According to HSBC, ABS market participation in Europe is composed of approximately 40% asset managers, 30% banks, and 20% central banks, with the remaining 10% comprising pension funds and others. Note that this is not evenly spread across the continent; in the UK, for example, asset managers comprise nearly 70% of the market participants and there is virtually no participation by central banks, pension funds, or others.

Further analysis of these deals and the banks involved, again, cannot be completed within the scope of a single Wonder request, though we deem it likely that further study would yield additional insights.
Sources
Sources