“CQS loans will not become a widespread direct substitute for consumer loans, despite better transparency, higher levels of central bank surveillance, and the fact that the product will become more attractive for financial institutions,” said Leonardo Scavo, an analyst in the structured finance team of Scope Ratings and co-author of a comment out today.

Historical data from originators and from public securitisations show that losses on this asset class are significantly lower than standard consumer finance products: just 0.8% compared to 4.6% on standard consumer loans and 2.0% on residential mortgages. This is mainly due to the inherent features of CQS loans, which make them safer for lenders.

The new risk-weights, which will enter into force in June 2021, could release between EUR 500m and EUR 1bn of banks’ regulatory capital, based on the stock of CQS loans as of September 2019 (EUR 19.1bn). Scope does not believe the capital released will translate into significant growth in the CQS market, however, seeing the volume of securitised loans remaining relatively stable in the short term.

“We see three main reasons why the CQS securitisation market may not develop further in the short term,” said Paula Lichtensztein, a senior representative in Scope’s structured finance team and co-author of today’s comment. “CQS loans are still a niche product; underwriting and servicing CQS loans requires specific skills compared to standard consumer loans; and the Bank of Italy requires among other things higher underwriting standards and more transparency on distribution and brokerage costs.”

This has contributed to a slowdown in the origination of new loans, but also to a consolidation of the market, with some operators exiting the segment.

The full comment can be downloaded here.