Synthetic securitisation market: Bilateral and growing
Trends in synthetic securitisation can be grouped into two episodes. Before the
crisis, most transactions were rated by credit rating agencies and issuance
volumes were publicly available. This type of transparent issuance peaked in
Europe in 2005, reaching EUR 180 bn, up from EUR 60 bn in 2001 .
The boom was partly driven by a surge in arbitrage synthetic securitisations.
They allowed “originating” banks (i.e. The protection buyers) to increase the
variety of instruments they could acquire without funding the credit exposure.
Yet they were highly complex, and risks associated with these positions were in
some cases unclear. Investors in these products were exposed to relatively high
losses (Segoviano et al, 2013). Consequently, the market for arbitrage synthetic
deals – and rated issuances in general – came down gradually to EUR 33 bn in
2008 and has since vanished.
Since the crisis, synthetic securitisation deals have become bilateral. At the
same time, volumes have gone up significantly recently, from EUR 20 bn in
2013 to EUR 94 bn in 2016.
Last year, five large deals alone
amounted to about EUR 20 bn. It is important to note that, with the now opaque
structure of the market, these figures should be considered as lower-bound
estimates rather than a precise account of market activity. Of the recent
issuance volumes, more than 90% were balance sheet transactions where the
originator transferred the credit risk of the underlying loans to the capital
markets. The investor base for balance sheet synthetic deals usually consists of
non-bank investors, mainly hedge funds (47%), pension funds (22%) and
sovereign-wealth funds or public/supranational investors (20%) (EBA, 2015).
EU Forecast
euf:ba1.8i:163/nws-01