## Securitization: Restore Credit Flow to Revive Europe’s Small Businesses _IMF Blog, May 7, 2015_ ## Source details **Canonical URL:** [Securitization: Restore Credit Flow to Revive Europe’s Small Businesses](https://www.imf.org/en/blogs/articles/2015/05/07/securitization-restore-credit-flow-to-revive-europes-small-businesses) ## Other formats - [Markdown version](/en/blogs/articles/2015/05/07/securitization-restore-credit-flow-to-revive-europes-small-businesses/index.md) - [Structured JSON version](/en/blogs/articles/2015/05/07/securitization-restore-credit-flow-to-revive-europes-small-businesses/index.json) - [Bundle manifest](/en/blogs/articles/2015/05/07/securitization-restore-credit-flow-to-revive-europes-small-businesses/bundle-manifest.json) ## Bibliographic details - Authors: Shekhar Aiyar, Bergljot Barkbu, Andreas Andy Jobst - Published: May 7, 2015 --- ### Role and importance of SMEs - SMEs account for "99 out of every 100 businesses" in Europe. - SMEs employ "two in every three employees". - SMEs generate "58 cents of each euro of value added of the business sector in Europe". - Improving access to finance for SMEs would support a broad-based recovery for Europe. ### SME reliance on banks and crisis impact - In 2014, "more than two-thirds of SMEs in Europe used bank financing". - In 2014, "less than one fifth used non-bank financing sources, such as equity and debt securities". - Heavy dependence on banks made SMEs vulnerable when the crisis led banks to raise interest rates and ration credit more tightly to SMEs than to larger firms. ### Potential gains from securitization - Quick and lasting gains: - Securitization could help SMEs attract non-bank funding by enabling banks to sell securitized loans to investors. - For banks, securitization would free up capital to support new lending. - Long-term funding: - SMEs will also need direct access to bond markets, private equity, and venture capital. - Scale of opportunity: - Combined stock of outstanding SME securitization in Germany, France, Italy and Spain was "€57 billion in mid-2014". - Banks’ outstanding SME loans in those countries were "€849 billion". - "Just above five percent of SME loans are currently securitized." ### Risk record and standards for safe securitization - Historical default performance for European securitization instruments has ranged between "0.6 to 1.5 percent". - Default performance for securities backed by SME loans has been "0.1 percent". - Policy objective: limit risks further by encouraging "simple, transparent, and prudently-structured securitization instruments". - High-Quality Securitization (HQS) proposal: - HQS instruments should meet strict rules on asset eligibility and quality. - HQS instruments should be subject to rigorous disclosure and reporting requirements. - SME securitization would include specific requirements to mitigate SME loan risks. ### Policy actions to boost SME securitization - Recognizing high quality: - Regulators should treat transparent, prudently-structured HQS more leniently than opaque, complex forms. - Regulators need to "settle on a uniform definition for HQS and then apply it consistently across all European Union financial regulations." - Better infrastructure: - Harmonize credit reporting. - Take steps toward "a functional convergence of debt enforcement regimes across European Union countries." - Expected effect: lower cost of securitizing SME loans and encourage cross-border investments. - Targeted official support: - Integrate existing initiatives (European Investment Fund’s standing facility for credit enhancements; the European Union SME Initiative; COSME; the European Fund for Strategic Investment) to boost catalytic role. - European Investment Bank could act as a strategic investor to jumpstart the market. - Recognition of HQS as collateral for Eurosystem liquidity operations could help develop a deep and liquid securitization market. ### How SME securitization works (mechanics) - Definition: pooling income-producing assets so they can be repackaged and sold to investors. - Typical steps: - Step 1: A bank pools SME loans into a "reference portfolio". - Step 2: The bank sells the portfolio to an issuer, such as a special purpose vehicle, passing on most of the credit risk and freeing up capital for new lending. - Step 3: The issuer finances the acquisition by selling tradable securities to capital market investors; investors receive interest payments funded by cash flows from the SME loans. - Structural features: - Portfolio assets are detached from the bank’s balance sheet (and its credit rating), allowing issuers to raise funds more cheaply. - Slicing securities into "tranches" tailors risk-return properties to different investors and broadens the investor base. *Source: Shekhar Aiyar, Bergljot Barkbu, Andreas (Andy) Jobst — May 7, 2015 (IMF blog).* --- ## Content in this bundle - **untitled** - [untitled (Markdown version)](/finance/consultations/2015/capital-markets-union/docs/green-paper_en.pdf.md){rel="alternate" type="text/markdown"} - [untitled (PDF)](/finance/consultations/2015/capital-markets-union/docs/green-paper_en.pdf){rel="external" type="application/pdf"} - **Staff Discussion Note** - [Staff Discussion Note (Markdown version)](/external/pubs/ft/sdn/2015/sdn1507.pdf.md){rel="alternate" type="text/markdown"} - [Staff Discussion Note (PDF)](/external/pubs/ft/sdn/2015/sdn1507.pdf){rel="external" type="application/pdf"} - **Staff Discussion Note** - [Staff Discussion Note (Markdown version)](/external/pubs/ft/sdn/2015/sdn1507annexII.pdf.md){rel="alternate" type="text/markdown"} - [Staff Discussion Note (PDF)](/external/pubs/ft/sdn/2015/sdn1507annexII.pdf){rel="external" type="application/pdf"} --- ## References - [https://www.imf.org/wp-content/uploads/2015/05/eur-blog-sme-securitization-chart-1.jpg](https://www.imf.org/wp-content/uploads/2015/05/eur-blog-sme-securitization-chart-1.jpg) - [“What is Securitization?”](http://www.imf.org/external/pubs/ft/fandd/2008/09/basics.htm) - [https://www.imf.org/wp-content/uploads/2015/05/eur-blog-sme-securitization-chart-2.jpg](https://www.imf.org/wp-content/uploads/2015/05/eur-blog-sme-securitization-chart-2.jpg) _Source: https://www.imf.org/en/blogs/articles/2015/05/07/securitization-restore-credit-flow-to-revive-europes-small-businesses_