Overview of securitisation activities in Ireland

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Anne Avis White
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1 OECD Working Party on Financial Statistics Workshop on securitisation, May 2010 Agenda item 3.1: Accompanying note to presentation Overview of securitisation activities in Ireland Introduction Securitisation has been used extensively by Irish credit institutions in recent years, and lending to residents that has been moved off credit institution balance sheets has been accounted for in the statistics published by the Central Bank due to its relevance in understanding credit developments and lending growth rates. However, statistical information on the wider population of entities which have been engaging in securitisation involving credit institutions not resident in Ireland and, indeed, noncredit institutions is only now available. The purpose of the presentation, and the contribution it hopes to make the OECD workshop, is to provide some background to the securitisation industry in Ireland and to provide an overview of some diverse activities carried out. Most importantly, the usefulness of qualitative information regarding the activities carried out will be stressed both for the analysis of the sector, and also as a tool to help ensure quality. Background Securitisation in Ireland uses special purpose vehicles ( financial vehicle corporations ). As in other common law jurisdictions, the vehicle is typically set up as a bankrupt remote orphan company with the beneficial shareholding held on trust by share trustees. Directors of the FVC are often provided by its corporate services 1

2 provider in addition to a registered address for the vehicle and other administrative roles. FVCs come under the framework of Section 110 of the Taxes Consolidation Act 1997, as amended by Section 48 of the Finance Act Qualifying companies must register with the tax authority 1, and may then utilise certain tax treatments which allow them to be structured as profit-neutral, and hence tax-neutral. They may hold a wide range of financial assets, including equities, bonds, receivables, carbon credit, leases, and derivatives. Development of securitisation by Irish banks The first securitisation of Irish mortgages took place in 1996, but volumes have since grown to around 37 billion. Chart 1 shows the growth of securitisation of domestic residential mortgages, which has been in three stages. In the early stages it was conducted primarily by specialist mortgage lenders. Although its use was not widespread, the percentage of total outstanding residential mortgages which were securitised reached 12% in mid In the second stage of rapid growth, the use of off-balance sheet securitisation became more widespread, and played an important role in filling the funding gap which arose in a period of expanding credit. Despite the freezing of these markets during the financial crisis, the levels of securitised lending reached unprecedented levels, at a peak of 26% of all outstanding mortgages in mid The motivation for these internal securitisations was to create eligible assets to be used in refinancing operations with the European Central Bank. Statistically, these have been treated by the Central Bank as off-balance sheet in the same way as the previous securitisations. Securitisation may also be effected through the issuance of covered bonds, which was enabled by legislation in 2001, and first carried out in A number of banks created mortgage banks under this legislation. Loans were transferred to these institutions, which then issued Asset Covered Securities. As these institutions were themselves Monetary Financial Institutions (MFIs), the loans stayed on banks balance sheets 2. 1 Not all qualifying Section 110 companies are FVCs, however. 2 Opinions vary on how these fit in to the concept of securitisation. As this method does not use FVCs, they will be disregarded in the remainder of this note. 2

3 Chart 1: Securitisation by domestic credit institutions EUR billion 45 Securitised mortgages (LHS scale) Securitised mortgages as percentage of outstandning mortgages (RHS scale) First period of growth Second period of growth: originate and distribute Post-crisis growth: internal securisations 30% 25% 20% 15% 15 10% % 0 0% FVC Regulation ECB/2008/30 The FVC Regulation has a very broad definition of securitisation which encompasses the transfer of assets or a pool of assets to a securitising entity, or the transfer of credit risk to a securitising entity. The activities of the FVC which may qualify as issuance include issuing of debt securities publicly or through private placement, and also potentially funding through the use of derivatives or loans. The first collection of data under the FVC regulation in Ireland was with respect to Q Most vehicles supply the full reporting requirement on balance sheets, financial transactions and write-downs/write-offs of securitised loans. In addition, holdings of debt securities are provided on a security-by-security basis, where the security has an ISIN code identifier. Smaller FVCs below a threshold of 180 million have a reduced requirement, and provide only a total assets figure on a quarterly basis. This derogation applies to over a third of vehicles, but their aggregated total assets are less than 5% of the national total. Preliminary data show that the aggregated balance sheet for the sector was over 500 billion. However, there are a number of grey areas at the margins of the definitions in particular around the issue of issuance which remain to be resolved. Clarification of the definition at a (harmonised) euro-area level will be important in establishing the official register of FVCs and reporting population. 3

4 Securitisation activities of FVCs resident in Ireland The register of FVCs must include the nature of securitisation true-sale, synthetic, or other FVC. True-sale FVCs make up 72% of the population by total assets. The volume of synthetic securitisation is significant in Ireland relative to many other jurisdictions, at 19%. Currently, 9% of resident FVC total assets are in the other nature of securitisation category. These include, in the main, vehicles which are carrying out both true-sale and synthetic securitisations. It has not been decided whether these should stay in this category, or be assigned to another category based on majority, or split on a pro rata basis between categories. As well as the nature of securitisation, Irish FVCs were also requested to provide information on the type of the vehicle 3. This information was in addition what was required by the FVC Regulation. Where the type of activity provided was not available or insufficient, other sources for the classification were used, for example the prospectus, stock exchange or audited annual accounts. FVC activities and nature of securitisations are provided in Chart 2. Chart 2: Activities of resident Financial Vehicle Corporations EUR billion Residential MBS Commercial MBS Consumer ABS Corporate ABS CDOS/CLOs Multi-issuance programmes True-sale FVCs Synthetic FVCs Other FVCs ABCP conduits Other 3 The list included Residential MBS, Commercial MBS, Consumer ABS, Corporate ABS, Cash (i.e. true-sale) CDO, Synthetic CDO, and Other. Two common other classifications have been added by the Central Bank as categories: ABCP and Multi-Issuance Vehicles (MIVs). 4

Due to the obvious heterogeneity of the activities carried out by resident FVCs, this additional information provides an important extra dimension in understanding the sector and underlying

Chart 3: Aggregated balance sheets of FVCs by activity Synthetic CDO Residential MBS Other Multi-Issuance programmes Corporate ABS Consumer ABS Commercial MBS Cash CDO ABCP 0% 10% 20% 30% 40% 50% 60%

Information on the type of FVC also provides an additional tool in ensuring the quality of the data, as a misclassification by reporting agents can be more easily determined when one knows what

5 Due to the obvious heterogeneity of the activities carried out by resident FVCs, this additional information provides an important extra dimension in understanding the sector and underlying developments. The aggregated balance sheets of FVCs by activity are provided in Chart 3 4. Chart 3: Aggregated balance sheets of FVCs by activity Synthetic CDO Residential MBS Other Multi-Issuance programmes Corporate ABS Consumer ABS Commercial MBS Cash CDO ABCP 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Deposits and loan claims Securitised loans Securities other than shares Other securitised assets Shares and other equity Financial derivatives Fixed assets Remaining assets Information on the type of FVC also provides an additional tool in ensuring the quality of the data, as a misclassification by reporting agents can be more easily determined when one knows what should be underlying the securitisation. Conclusion There is scope to enhance the usefulness of quantitative data by combining the information on the nature of securitisation (true-sale, synthetic) with information the type of activity engaged in by the FVC (RMBS, CMBS, etc). The value-added of even high level qualitative information is considerable. 4 Note, again, that this is preliminary data. 5

6 The FVC type categories used in this presentation are in line with common industry classifications, with the addition of multi-issuance vehicle 5 as a specific national type. This could be supplemented with more detailed information on activities or strategies of vehicles, although there are likely to be diminishing marginal returns. Further information on the links between vehicles and sponsor or arranging banks would also be useful in monitoring developments and ensuring the quality of data particularly for transactions which use FVCs in a number of jurisdictions. 5 An MIV is a single entity which issues multiple (perhaps dozens) series of notes in which specific assets are contractually ring-fenced to a specific issuance, and are hence bankrupt-remote from each other. This is similar to structures in other jurisdictions which use compartments. 6

Special Purpose Entities (SPEs) 1 Statistics Q2 2018

Statistical Release Special Purpose Entities Statistics Q2 2018 7 September 2018 Special Purpose Entities (SPEs) 1 Statistics Q2 2018 Total assets of Irish-resident SPE vehicles increased in Q2 2018, by