The European Central Bank (ECB) wants to stimulate the high-quality small and medium enterprise (SME) securitisation market in Europe in order to help the wider economy, according to Yves Mersch, member of the ECB’s executive board.

While European corporate bond issuance has recently risen, this type of capital market finance is usually reserved for large companies.

SMEs often do not have access to such non-bank finance as lending to these companies is considered to be riskier and the issues would inevitably be small and illiquid. SMEs usually have historically no option but to rely on bank finance – but now banks are trying to deleverage and are reluctant to take additional risk on their balance sheets.

Mersch said: “We have a situation where certain banks own assets with risks and capital charges that they don’t wish to bear and on the other hand there are investors willing to bear those risks. In my view this is a match that should happen at least in an efficient functioning system. Securitisation of SME loans is exactly the way to achieve it.”

He added that non-bank investors in and outside of Europe – such as insurers, pension funds, hedge funds – are seeking investment assets with maturities and returns that match their liability profiles. Yet many investors are still wary of securitisation given the issues with the 2007 US sub-prime mortgage crisis. Many regulators have also clamped down on the ABS market.

Mersch, who made the comments at Clearstream’s Exchange of ideas conference in London on April 7, was sceptical of current and proposed regulation of EU asset-backed securities (ABSs), particularly the treatment of securities backed by SME assets.

“The ECB feels that EU ABSs are being treated inappropriately by present regulations.” He pointed out that as ABSs come in “many shapes and colours”, their risk profiles can differ enormously.

“The securitisation capital framework is being overhauled on an international basis with proposals largely calibrated on a single pool of data that does not reflect differences in standards across the world, nor structural difference between deals, nor the vast difference … Nor can proposed calibration fully reflect the full benefits of the recently-adopted regulatory enhancements .”

Mersche said he feared that imposing strict risk weights would not only curtail any growth in the EU SME securitisation market but cause further damage to the wider markets.

“The revised securitisation framework should reflect the features of high-quality securitisation. Therefore it is important that the EU moves ahead swiftly in addressing inconsistencies, at least in high-quality securitisation.”

He highlighted the high credit quality of many European SME ABSs: “Single European SME ABSs generally have consistently had greater credit enhancement than nearly all other EU ABSs.”

Mersch acknowledged there is a risk that the underlying assets in ABSs are of poor credit quality and that even in the EU loan delinquencies in certain weaker economies have reached double-digit levels.

However he argued that “important and sensible countermeasures” have been implemented in the EU since the sub-prime crisis such as improvements in underwriting criteria and the Credit Requirement Regulation. Mersch also noted the “unprecedented levels of transparency” through the creation of loan-by-loan reporting rules that enabled investors to analyse credit quality of loans and look at correlations across portfolios.

“Sensible assets and structural safeguards can go a long way to mitigate the risks of investing in ABSs.”

One challenge is how to separate high-quality from low-quality ABSs and what criteria to use as a benchmark. Mersche proposed giving preferential treatment only to instruments that meet the strictest requirements. While suggesting that central banks’ eligibility criteria on ABSs “could be a useful starting point” to identify high-quality instruments, he said there should not be complete reliance on it.

The European Insurance and Occupational Pensions Authority (Eiopa) recently proposed an approach that is partly influenced by the eurosystem eligibility framework.

At the end of 2013 the regulatory body proposed introducing a more granular treatment for securitisations. Instead of the currently proposed uniform 7% spread risk charge for AAA-rated securitisations, Eiopa recommended lowering the charges for less risky issues to 4.3% while increasing charges for riskier issues to 12.5%.

For identifying less risky securitisations Eiopa developed a set of criteria related to the structure of securitisation, the quality of the underlying assets, the underwriting processes and the transparency for investors.

Mersche said this approach was “relatively simple” while “excluding many particularly risky ABSs”.