Securitization is increasingly used as a funding source

LONDON (Reuters) – A report published yesterday by Standard & Poor’s Ratings Services explores how securitization is increasingly being used by Greek mortgage lenders as an alternative funding source. The report explains how Greece is in the midst of a rapid credit expansion phase as local deregulation, lower interest rates, and improved living standards have increased housing demand, and thus the demand for mortgage loans. «To fund this expansion, as well as to counter local and foreign competition and comply with banking regulations, Greek mortgage lenders are seeking alternative funding sources,» said Ioanna-Victoria Kyritsi, a credit analyst in the Structured Finance group in London. «One possible source is securitization, which offers funding solutions to the banks not provided by the more traditional funding sources.» Kyritsi admitted that rating transactions originated in a relatively new market can be challenging: «When examining securitizations backed by Greek assets we face certain legal and analytical issues, in particular in mitigating setoff risk, commingling risk, and dealing with data inadequacies,» she said. «But through conservative assumptions in our stress testing and enhancement requirements these rating concerns can be overcome.» Indeed, with a fourth RMBS securitization imminent this funding source is showing that it wasn’t a one-off in the Greek market but instead is expected to be increasingly tapped to fund Greece’s credit growth boom. The banks traditionally have financed their assets through their customer deposits, inter-bank borrowing, or European medium-term note issuance. «The cheapest and most popular source remains customer deposits, although for most of the banks these have been lagging the loans they have issued,» according to credit analyst Brian Kane, a director in the group. «Furthermore, local banks must meet the minimum capital requirements of the Basel II Accord.» Kane explained that one way in which Greek banks are responding is by finding cheaper funding sources. «While securitization may still be a relatively new funding technique in Greece, it may be the answer to banks faced with sharp mortgage market credit expansion,» he said.

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