When adequately structured and if correctly monitored within a commonly accepted framework, synthetic securitisation or risk-sharing transactions are a positive tool for the banking sector.
Securitisation was almost deemed to be a bad word at the end of the global financial crisis. Following the Bear Stearns demise, Lehman collapse and the credit crunch, a number of investors discovered that an alphabet soup of credit products were at the onset of the crisis. ABCP, CPDO, CDO and CDO-square to name only a few were splashed across the news as the main culprits for the worst financial crisis post World War II. Aside from plain vanilla structured credit, the most complex structures disappeared for a while and investors focused on simpler strategies. 2016, however, saw a robust return of bank’s balance sheet synthetic securitisation deals and 2017 is very likely to see even more of those trades. Bloomberg reported recently that Nordea and Lloyds Banking Group have both used these types of transactions as a way to reduce their credit risk exposure. Last year, Dutch pension fund PGGM also disclosed a EUR 2.3Bn transaction with the Spanish lender Banco Santander. What are exactly these deals and do they pose a threat to the system?