Bank of England Securitisation Paper July 2014
We are principally concerned in responding to this discussion paper to highlight the role that secondary markets and securitisation play in facilitating the extension of credit by credit unions in the USA and, therefore, the potential that a revived and expanded securitisation market could have in Britain. This would be in line with broader efforts to grow credit unions and enhance competition in UK financial services.
In the USA more than 40% of the population use credit unions. This compares with a figure of approximately 2.5% in Britain. There are numerous historical and structural reasons for the position of US credit unions, not least the localised and fragmented banking and financial sector which has deep roots in the history of de-regulated US finance. However, a key factor in their continuing success is their ability to provide a full service offering to their members so that a typical member of the public can fulfil their whole range of financial needs with a credit union. There are a range of different services which this encompasses, of particular importance being transactional banking, however credit products – in particular mortgage and auto loan products – are of central importance as the principal source of revenue for credit unions.
While credit unions in the US in aggregate are much larger than their British counterparts and some of the largest institutions are very large – the largest, Navy Federal Credit Union, has 4.5 million members and more than $50 billion in assets – the vast majority of US credit unions are below $100 million in assets. At these leverages, credit union mortgage finance in particular (but also certain forms of other larger-sum, longer-term finance) which is held to maturity on the originator’s balance sheet would be precluded due to scale. Thanks to the availability of liquid securitisation markets, however, US credit unions of virtually all scales can originate mortgages for their members and sell them for securitisation.
A critical feature in this process are the institutional arrangements provided under the Government Sponsored Entities (GSEs), Fannie Mae and Freddie Mac. While the US credit union regulator – the National Credit Union Administration – has recently reformed its regulations for credit unions in order to allow larger credit unions a level playing field in issuing their own asset-backed securities, for most credit unions they are not at a sufficient scale or level of sophistication to do so. Instead they rely upon the sale of mortgages and other loan assets to the GSEs for their use in the construction of ABSs for sale into the secondary market.
Of course, we appreciate fully the controversial position which the GSEs have occupied in the US and around the world since the Global Financial Crisis given their facilitation of securitisation. However, we are also aware that underwriting, origination and participation standards have been significantly tightened since 2008 and this has facilitated the GSEs repaying their obligations to the US Government which was required to bail out the GSEs during the crisis.
We are very supportive of the Bank of England and European Central Bank exploring the options for expanding securitisation in Europe with a view to expanding the European credit supply. We feel strongly that the example of full service credit unions in the US demonstrates the capability of this process to open up new sources of credit for the benefit of the economy. We therefore endorse the Bank’s identification of the benefits of securitisation. Similarly, we are broadly supportive of the identified impediments to both issuers and investors in securitised assets and the benefits of a qualified securitisation model with better underwriting and information as standard.
What we would like to stress, however, is that it is our opinion that the securitisation market will only be boosted to the levels seen in the US – and for the benefit of those currently denied fair access to credit – if there are supportive institutional arrangements put in place to facilitate the origination and sale of loan assets for securitisation by community institutions like credit unions. Such an institutional arrangement would not need to be government-backed, but without at least private facilitation we do not think the full benefits of securitisation will be realised in Europe.