Moody's Investors say regulatory costs and a lack of liquidity inhibit the growth of Europe's structured finance market

In a round table discussion, Moody's Investors Service found that the European securitisation market's regulatory capital costs is a barrier to demand, in addition to a lack of liquidity. 

In a new report published today, the rating agency says investors do not believe the capital treatment of European structured finance instruments reflects their associated risks. 

"Investors desired change in the capital framework for banks that hold structured finance instruments, which could create more liquidity in the market. The market's growth depends on the arrival of more bank investors, in their view," commented Jean Dornhofer a Moody's Senior Vice President and author of the report. 

"While investors consider the idea of standardisation - as part of criteria for qualifying securitisation - to be a step forward for the market, they say it should be a second-order objective as it doesn't create demand," she observed. 

The new report: "Investors Say Regulatory Costs and a Lack of Liquidity Are Barriers to the Growth of European Structured Finance Market," is available on www.moodys.com. 

Moody's found these investors consider that the regulatory capital treatment of structured finance instruments does not reflect their associated risks. If the current levels of regulatory capital associated with structured finance instruments remain the same, the European structured finance market will not return, according to some investors. Investors say the concept of a qualifying securitisation provides an opportunity to revisit the rules on capital and liquidity treatment of structured finance instruments and align them with instruments of equivalent risk. 

The discussion revealed that the expansion of the European structured finance market depends on the arrival of more bank investors. A change in the capital framework might help create more liquidity in the structured finance market. Investors consider that banks do not want to invest in instruments that cannot be easily liquidated. Improving the standardisation of capital treatment of structured finance instruments versus other instruments would help increase the investor base, increasing liquidity in the secondary market. The low depth of the secondary market affects the appetite of "real money" investors. 

Investors said that issuers need to find a broader, active investor base for mezzanine and equity tranches. With spreads tightening, hedge funds may exhibit less demand for subordinated tranches. 

Moody's report summarises investors' general feedback, rather than the specific view of any individual participant. As the number of participants is not statistically significant, the findings are more anecdotal than scientific. The views expressed are not necessarily Moody's view.