Online seminar: Sovereign-bond Backed Securities (SBBS) from Theory to Practice
The latest online seminar by the Florence School of Banking and Finance focused, entitled ‘Sovereign-bond Backed Securities (SBBS) from Theory to Practice’, was held on 22 June 2018.
The discussion focuses on the recent proposal by the European Commission for a regulatory framework for sovereign-bond backed securities (SBBS). Speakers in the seminar were two Commission officials involved in the preparation of the proposal: Peter Grasmann, Head of Unit ‘Economic Analysis of Financial Markets and Financial Stability’ at Directorate-Gerenal ‘Financial Stability, Financial Services and Capital Markets Union’ (DG FISMA), and Davide Lombardo, Senior Economist in the EU/Euro Area Financial Sector Unit.
A novel concept, Sovereign-bond backed securities (SBBS) have a potential to improve the status quo, ensuring more geographical diversification of banks’ government bond holdings (resulting in better cross-border risk sharing via the private sector) and resulting in an additional supply of low-risk assets. But they face several regulatory hindrances. An incomplete banking union, especially the lack of a common deposit insurance scheme and of backstops, as well as the “home bias” that results in a risk misallocation are reflected in the bank-sovereign loop, which was a key factor in the euro area debt crisis.
The recent Commission proposal aims to abolish or alleviate the regulatory hindrances currently faced by SBBS. In this online seminar, the speakers outlined set of eligibility criteria, including a fixed portfolio of euro area sovereign bonds, the proposal to introduce tow tranches (senior and sub-senior) and procedures to modify portfolio and size of the senior tranche in specific and future circumstances. Then, the speakers outlined the compliance framework setting the rules for the system and the proposed legislative changes to the regulatory framework.
The presentations was followed by an interactive Questions and Answers session. Asked what are the biggest obstacles to the success of SBBS, the participant pointed out in first place to insufficient incentives for banks to switch from national bonds to SBBS (58%), then to insufficient demand for riskier tranches (29%) and finally on the costs associated with setting up and managing the SPE/servicing the SBBS (13%).