Readers recall the key events over SCI's first 20 years
The first issue of Structured Credit Investor was published this week in 2006 and since then the publication has provided structured credit news and analysis to the buyside through ever-changing times. SCI has documented not only the evolution of the securitisation markets over the last 20 years, but also the broader transformation of risk transfer and capital formation across the financial services landscape. Here, some of SCI’s long-standing readers recall the key market events of the last two decades.
The GFC and regulatory reset
Two years into SCI’s existence, Lehman Brothers collapsed, marking the publication’s biggest test but also establishing it as an essential source of information as the securitisation market initially shut down and then began rebuilding – ultimately becoming more resilient and witnessing a dramatic expansion of capital sources.
“From 2009 to 2013, securitisation remained a dirty word and synthetics even worse,” observes Olivier Renault, head of risk sharing strategy at Pemberton. “Regulators were hellbent on trying to curtail such activity. The losses experienced post-GFC were not in core bank books, but it was impossible to have a rational conversation.”
The paradox of the financial crisis was that European consumer ABS, RMBS and CLOs performed as they were supposed to. What blew up was US subprime and CDO-squared structures, yet the US securitisation market bounced back relatively quickly.
“Europe took longer to clean up post-crisis. Many US banks bit the bullet and sold troubled assets, whereas European banks delayed the pain, resulting in less capacity for investment and rebuilding,” Renault explains.
Angus Duncan, partner at Hunton Andrews Kurth, agrees that US policymakers acted proactively post-GFC, with regulators seemingly more open to engaging with feedback from market participants. In contrast, a cumbersome process at the EU level - often combined with competing interests – means that European policymakers have responded less nimbly.
Nevertheless, Duncan believes that the securitisation market is in a better place post-GFC. “The impact of regulatory change has been huge; regulation is the first thing I think about when structuring a transaction. However, while regulation has been effective in providing constraints, its implementation hasn’t been as effective as it could have been.”
Specifically, from a growth perspective, he suggests that the lack of a streamlined approach has hampered the market’s development. “US securitisation is predominantly regulated at the federal level and is a much bigger market. Europe struggles to compete, even though it has a similarly sized economy, due to a lack of homogeneity and a multiplicity of legal systems and rules. Historically, Europe has focused more on bank lending than capital markets finance.”
Securitisation: crucial for economic growth
It took over 10 years to return to an environment where securitisation wasn’t maligned and now the pendulum appears to be swinging the other way. “Regulators and lawmakers are saying they want more securitisation, especially standardised, transparent and resilient securitisation. Recent regulatory developments mark a sea change in acceptance of the product: policymakers have moved from trying to pile as much capital on bank balance sheets as possible to recognising that they need to facilitate bank lending or the economy won’t grow,” Renault notes.
The forerunner of what are now recognised as SRT transactions first emerged in 2006 and were executed bank-to-bank, whereby one counterparty acted as protection seller to another. However, the market was characterised by significant discrepancies in capital treatment across jurisdictions.
Then came Basel 2, in late-2006 to 2008, depending on the jurisdiction – which disincentivised bank-to-bank deals and saw them replaced by bank-to-nonbank deals. Under Basel 1, the senior tranche was hedged, but this no longer made sense under Basel 2 as banks were incentivised to hedge junior risk.
Synthetic securitisations that minimised the genuine transfer of risk disappeared with the GFC. Now there is an appreciation that the SRT market needs regulators onboard and that investors understand and can price the risk appropriately, according to Renault.
He suggests that the key inflection point in Europe was in 2015 when the ECB took over harmonising rules across the eurozone, prior to which there had been a “constellation of different regulators and regulatory frameworks”. A consistent set of regulatory rules, which were further clarified by the EBA in 2020, created a solid foundation for the SRT market to grow.
“We know what the rules are and that following them is the path of least resistance,” Renault confirms. “New SRT jurisdictions, issuers and asset classes continue to emerge. Some SRT programmes have even become cookie-cutter issuances – that’s the benefit of the market becoming more standardised.”
Broader ecosystem supports risk diversification
The difference between the securitisation market of 2006 and that of 2026 is stark. “Twenty years ago, many securitisation markets were funded by a relatively defined group of capital markets investors. Today, risk is supported by a much broader ecosystem that includes insurers, reinsurers, asset managers, private credit investors and traditional capital markets participants. This diversification has made markets more efficient, more resilient and ultimately more capable of supporting economic growth,” says Jeffrey Krohn, md, mortgage and structured credit leader at Guy Carpenter.
In particular, the traditional distinctions between insurance capital, reinsurance capital and capital markets capital are becoming increasingly blurred. Capital is seeking risk wherever it can find attractive returns, and issuers are increasingly focused on accessing the most efficient source of capital rather than a specific channel.
However, it’s not simply a matter of cost and efficiency: insurance capital also brings flexibility of coverage, including forward coverage and structures that can be tailored in ways capital markets are often challenged to replicate. “As a result, we are seeing a convergence of financial and (re)insurance capital that would have been difficult to imagine two decades ago. Whether through credit risk transfer (CRT)/significant risk transfer (SRT), insurance-linked securities, synthetic risk transfer or other structured credit solutions, the common theme is that markets have become more effective at distributing risk to the parties most willing and able to hold it,” Krohn observes.
New economy: the next frontier
Looking ahead, Renault indicates that the next frontier for SRTs is transactions referencing niche 'new economy' assets - for example, data centre financings - which are increasingly accounting for a much greater portion of banks’ balance sheets. Demand is emerging from specialist investors or those seeking a diversified portfolio and/or spread pick-up.
However, Renault expresses some concern over the fact that such assets represent an untested risk profile. “SRTs typically reference diversified pools, whereas data centre portfolios are 'lumpy' due to the sheer size of the underlying financings. If the price of energy spikes, for instance, all the assets in a portfolio could be compromised at the same time,” he warns.
In terms of investor approaches to data centre portfolios, specialist CRE or infrastructure underwriting skills are necessary. One risk mitigant would be for the portfolio to consist of data centres running on a mix of renewable, nuclear and grid energy.
Regarding the next frontier for the broader securitisation market, Duncan points to the energy markets and included within that renewables and energy-related products that are emerging in the US – noting that “there is a case for them in Europe too” as the region will “need help financing these new methods of production as it transitions to the new energy markets”. He adds that securitisation technology is being successfully leveraged to facilitate the adoption of solar energy in Africa, which he anticipates being rolled out to other developing countries in the coming years.
As part of its 20th anniversary celebrations, SCI ran an elimination poll – coinciding with the FIFA Football World Cup – on LinkedIn to determine the most important securitisation market development since 2006. Regulation, risk retention requirements, asset class diversification, NPL schemes, the rise of non-bank financial institutions and the growth of the CLO market were all cited by the securitisation community during four rounds of public voting, but ‘growth of the SRT market/adoption of synthetic securitisation as a risk transfer tool’ was ultimately crowned the winner.
The securitisation market has seen it all over the last two decades and SCI has accompanied it every step of the way, bringing clarity to the complexity of this most cutting-edge of financial instruments. Long may the journey continue.