Covered bonds outstrip securitisations
Covered bonds have become a larger source of funding for Dutch banks than securitisations. The total amount outstanding in external securitisations in 2015 fell 22% to EUR 58 billion (EUR 55 billion of which are residential mortgages), whereas the amount outstanding in covered bonds grew to reach EUR 61 billion over the past years. The drop in external securitisations outstanding was caused in part by the low volume of new issues. In 2015, external investors bought EUR 5.5 billion worth of packaged loans via new securitisations issued by financial institutions based in the Netherlands, almost 50% down on 2014 and the lowest level seen since 2009.
Securitisations involve bundling of loan assets, especially bank loans to households and businesses, which are then packaged and sold as marketable debt securities via dedicated securitisation vehicles. Securitisations constitute an additional source of funding for banks. In the years following the outbreak of the credit crisis (mid-2007), securitisations were not or hardly sold to external investors, as trust in these products had been compromised, but a large number of internal securitisations did take place. Banks do not sell these securitisations in the market, but hold on to them principally for use as collateral in obtaining liquidity from central banks.
From late 2009, external securitisation issues picked up again, although they have remained below pre-crisis levels, due in part to their continued ill repute, stricter rules governing securitisations and weakened credit growth.
Fewer issues of securitisations
In 2015 Dutch securitisations to the total of EUR 5.5 billion were sold to external investors. This is EUR 4.8 billion (46%) lower than in 2014 and the lowest level seen since 2009 (see Chart 1), when the securitisations market regained consciousness following the crisis. For securitised residential mortgages only, external placements totalled EUR 5.1 billion, EUR 4.2 billion (45%) lower than in 2014. The drop took place in spite of the fact that the ECB extended its asset purchase programme to include securitisations, and it has a range of causes. One of these is the prudential treatment of securitisations, notably capital requirements, which are more onerous for investors compared with covered bonds, which are debt instruments issued by banks with residential mortgages serving as collateral. This makes securitisations less attractive to investors. New issues of securitisations also declined due to lower credit growth and the favourable funding terms prevailing on the financial markets, which in turn partly reflect the accommodating financing facilities offered by central banks. Also, banks scaled back their exposure to residential mortgages, which reduced their funding requirements, as relatively large volumes in new residential mortgage loans were granted by new mortgage providers, through which pension funds and insurers stepped up their investments in residential mortgages.
Besides external securitisations, internal securitisations in 2015 totalled EUR 14.8 billion, EUR 0.5 billion (3%) down from2014. In part, these served as replacements for maturing internal securitisations.
Amount of securitisations outstanding also down
As on balance more external securitisations matured than were newly issued, the total amount in external securitisations outstanding in 2015 declined by EUR 17 billion (down 22%) to EUR 58 billion (see Chart 2). Residential mortgage securitisations were the lion's share, receding by EUR 15 billion (22%) to EUR 55 billion.
Internal securitisations outstanding declined by EUR 16 billion to EUR 165 billion (down 9%), of which securitised residential mortgages were again the biggest part (9% down to EUR 157 billion). A possible cause of the drop is the fact that internal securitisations held for liquidity management purposes no longer count towards liquidity buffers according to recently introduced European liquidity rules.
As a result, total outstanding securitisations fell by EUR 33 billion (13%) to EUR 223 billion, the lowest level seen since 2007.
Covered bonds outstrip securitised residential mortgages
With external securitisations falling sharply, covered bonds have now outstripped them as a source of funding for residential mortgages (see Chart 3). External securitisations based on residential mortgages, known as residential mortgage-backed securities (RMBS), have receded from their 2007 peak of EUR 94 billion by almost 42%, landing at EUR 55 billion at year-end 2015. As a proportion of total outstanding Dutch residential mortgages their volume halved, ending at 8.3%. Issues of covered bonds, by contrast, increased sharply. In 2010 and 2011 in particular, Dutch banks issued large volumes of covered bonds, at around EUR 14 billion per annum, as they were having difficulty raising uncovered funding due to the European debt crisis. As a result, the amount outstanding had grown to EUR 61 billion by year-end 2013. In 2014 and 2015 issues totalled EUR 3.9 billion and EUR 4.6 billion, respectively, at attractive funding costs, partly on the back of the ECB's covered bond purchase programme. Moreover, through conditional pass-through covered bonds, covered bonds have also become an interesting option for smaller banks, as this type of covered bonds enables them to raise a relatively higher amount in funding for each mortgage. This caused the amount outstanding, after having edged down in 2014, to rebound to EUR 61 billion, or 9.3% of outstanding residential mortgages.
Until the end of 2013, the increase in covered bonds used to fund residential mortgages more than compensated for the reduction in securitisations, causing the total proportion of covered funding for residential mortgages to increase to 20.8% (see Chart 3). The past two years, however, have seen a contraction to 17.6%, roughly the same as the percentage for 2006, meaning that fewer residential mortgages were funded using external securitisations than covered bonds.