On Monday 16 August, the European Commission authorised the introduction of a new product in the form of guarantees on synthetic securitisation tranches under the European Guarantee Fund managed by the European Investment Bank Group to support companies affected by the coronavirus pandemic in the 22 participating Member States (see EUROPE 12640/4).
This new product, for which a specific budget of €1.4 billion is planned, should make it possible to mobilise at least €13 billion of new loans to small and medium-sized enterprises (SMEs) affected by the pandemic. This is a significant contribution to the overall objective of the European Guarantee Fund, which aims to mobilise up to €200 billion of additional funding in the 22 participating Member States (Austria, Belgium, Bulgaria, Croatia, Cyprus, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain and Sweden).
“The European Guarantee Fund, which is administered by the European Investment Bank Group, brings together support by 22 Member States and complements the national support schemes”, said Executive Vice-President Margrethe Vestager, in charge of competition policy.
In April 2020, the European Council endorsed the establishment of a European Guarantee Fund managed by the EIB Group as part of the EU’s overall response to the coronavirus pandemic (see EUROPE 12494/20).
To date, the EIB and the EIF have approved projects totalling €17.8 billion under the Fund, which is expected to mobilise some €143.2 billion in investment in total.
Synthetic securitisation is a financial technique whereby an originating entity (e.g. a bank) identifies a pool of existing assets (e.g. a portfolio of loans) which it holds on its balance sheet, creates tranches with different risk/reward profiles against that pool, and subsequently transfers a part of the risk stemming from the pool by buying protection on a specific tranche (for example by getting a guarantee on the relevant risk tranche) from a protection seller. In return, the originating entity pays a premium to the protection seller.
Under the new instrument, the EIB Group, acting as protection seller, provides protection to the financial intermediary in the form of a guarantee covering a specific risk tranche for a portfolio of existing assets, provided that the portfolio meets certain maximum size requirements and contains only performing exposures. In exchange for the guarantee, the financial intermediary pays a subsidised guarantee fee to the EIB Group.
This new product aims to encourage financial intermediaries to provide new, riskier loans to SMEs. The aim is to free up the lending capacity of financial intermediaries and prevent them from redirecting their resources to lower-risk assets at the expense of lending to SMEs. (Original version in French by Lionel Changeur)