Synthetic securitisation transactions are by nature bespoke, complex and not transparent: Contrary to ordinary securitisation transactions, the assets are not loans but derivative contracts offering the originator of the transaction a credit protection in exchange for remuneration paid to investors. Those credit protections are complex both legally and financially and they are impossible to monitor in real time by supervisors. Moreover, the benefit to the economy and to SME financing is non-existent, witness the fact that the banks most active in SME lending do not structure synthetic securitisation transactions today, or very marginally. Synthetic securitisation is a factor of acceleration and amplification of financial crises, exactly what happened during the last financial crisis, and making those transactions easier would therefore weaken financial stability.
The EBA discussion paper suggests that banks could use synthetic securitisation for arbitraging capital requirement regulation coming, among others, from the Basel III framework, the introduction of the output floor, IFRS 9 and the fundamental review of the trading book (see § 32, page 18). In other words, circumventing regulation is an essential motive for promoting STS synthetic securitisation.
By construction, if STS synthetic securitisation enables market participants to roll out transactions with a similar, and even an increased level of risk given their additional levels of complexity and credit risk, with less prudential constraints, it will lead to higher financial systemic risk.
See also our press release: “Promoting synthetic securitisation will only increase financial systemic risk with no benefit to the economy“, 26 November 2019