EconPol's proposals point the way forward
People love stories more than facts. The more catchy the story, the better. Last but not least, the Spiegel editor Claas Relotius showed us this in recent years with his "reports", pardon with his black-and-white stories, of vicious and simple-minded trump voters, heroic and selfless refugees, merciful helpers and collected one "journalist" prize after another for it. So for years we haven't seen all these "live reports" springing from his imagination while hardly a word was true.
A story, once it is in people's minds, is hard to get out of the world. Because the child in the man - and of course also the woman - also dominates the adult. Why deal with the cold, unromantic facts when the story provides a simple, stable view of the world to which one can adhere even in ignorance of the diversity of facts seeking help.
In the financial markets, hardly anyone has experienced this so clearly in recent years as all those who have dealt with securitisation. When the financial crisis broke out in 2007, the culprit was quickly found. Starting from the American subprime securitisations, all securitisations were equated with the financial crisis without taking a deeper look at the facts. Even reputable newspapers at the time headlined in their leading commentaries: "Securitisation is to blame for everything" (FAZ) and made the headline "Prohibit securitisations! (FTD). The story was rounded off with the causally inaccurate but politically appropriate conclusion that the financial crisis was the cause of the Eurozone crisis that followed.
It was a beautiful, catchy story that saved many from having to deal with the true causes of the financial crisis from 2007 to 2009. And: it lasted a long time until even its most stubborn supporters could no longer ignore the facts and began to realise that the US subprime market and the European securitisation market of 2007 had nothing to do with each other.
A decade after the outbreak of the financial crisis
Today, a decade after the financial crisis, we continue to look to Europe with concern. The years since the financial crisis have been little used to make Europe storm-proof for the next financial crisis. Often, all too often, the problems have been sought far from where they lie. Now time is pressing.
One weakness of European integration is undoubtedly the low degree of cross-border risk diversification in the banking sector. This, together with the high dependence of the European economy on bank financing, makes the European banking system more crisis-prone than it used to be. It acts as a catalyst in regional, national economic crises.
Employees of the Mannheim ZEW and the Munich Ifo Institute have investigated this topic in an EconPol Policy Brief as part of EconPol Europe, the European Network for Economic and Fiscal Research. Her contribution "European Financial Integration through Securitisation" examines what contribution securitisation can make to improving risk distribution in the European banking sector.
Options for action for the integration of the European financial market
European banks have a very high level of concentrated domestic risk in their balance sheets because the European banking sector has little European orientation. This is just as true for public finance as it is for corporate finance and loans to households.
There are three ways to improve this low level of integration. First, cross-border bank mergers; second, the redirection of financing flows away from banks towards capital markets; and third, the promotion and intensification of securitisation.
The first two options have obvious weaknesses. Cross-border banking mergers favour the emergence of further systemically important banks and all the risks they entail. The redirection of capital flows away from the banks to the capital market requires a change in historically grown savings and investment cultures.
The promotion of securitisation thus remains the most sensible instrument through which European policy can achieve better results in the short and medium term.
In the following, the authors examine the question of why Europe did not make better use of the opportunities offered by securitisation after the outbreak of the financial crisis against this background. They see the reasons for this in the political stigmatisation of securitisations in Europe, the resulting restrictive regulation and, even more importantly, in the regulatory uncertainty, but also in the policy of cheap money by the ECB, which replaced alternative financing instruments.
Against this background, the authors assess the new STS regulation as positive. It creates regulatory certainty and a uniform, good European framework for securitisations. In addition, it helps to overcome the continuing stigmatisation.
Further steps to create a level playing field
But in order to sustainably stimulate the European securitisation markets, one should not stop there. As further steps, they propose to create a level playing field for high-quality securitisations with other, comparable capital market instruments such as the covered bond and correspondingly
to adjust the RWA and capital adequacy requirements, and also
all other regulations such as the Liquidity Coverage Ratio (LCR)
to revise the way I see it.
Furthermore, not only the credit data for securitised loans by banks should be disclosed, but also the data for non-securitised loans. The data available through AnaCredit should also be made available to investors in securitised products so that they would have a better basis for assessing cross-border investments. In addition, the tax system and enforcement procedures for credit claims should also be adapted across Europe.
Since, according to the authors, cross-border securitisation investments by banks help to balance local, regional economic cycles and thus also serve the stability of the European financial system, they should also be favoured accordingly. This should be done through capital adequacy. Cross-border ABS investments should consequently be taken into account in the countercyclical capital buffer (CCyB), because the combination of CCyB with geographical risk diversification in Europe would make an important contribution to promoting risk sharing throughout Europe.
A European securitisation market that creates cross-border investments and risk diversification should also be promoted through guarantees and investments by public European development institutions. The EIB (European Investment Bank) and the EIF (European Investment Fund) already have experience in the use of securitisations for the purpose of SME promotion. This can be built on. The authors suggest that existing SME promotion programmes should concentrate more on securitisations of SME loans (in the broader sense, not in the narrower sense of the EU definition, which already corresponds to existing practice). This would not only promote cross-border risk diversification in SME financing, but would also be an important lever for advancing the asset class SME securitisations within the framework of the new STS rules for securitisations.
Appraisal of the EconPol Policy Brief
With their article, the authors Kirschenmann, Riedler and Schuler have undoubtedly made an important contribution to the current debate on how to use the new STS rules for securitisations to deepen the integration of European financial markets and to create further balancing mechanisms between the various countries and regions. Her paper is based on the objectives of the EU Capital Market Union project and provides indications for its further development. Many of its proposals can be implemented in the short and medium term, e.g. the corresponding orientation of European funding programmes. Others are more fundamental in nature and therefore require more thorough preparation and time, such as the adaptation of tax and enforcement systems. A European securitisation regime that goes beyond pure supervisory law and also takes into account tax and insolvency law facts would certainly be desirable.
It is striking that the authors concentrate all their considerations purely on true sale securitisations. They thus remain within the logic of the current version of the STS regulation. In our opinion, the importance of synthetic securitisation for risk diversification, especially in the European SME market, is neglected. Especially since synthetic securitisations can partially compensate for existing weaknesses in tax and insolvency law and still achieve the desired risk-sharing effects. This insight also appears to be slowly gaining acceptance at EU level. The EBA has the task of drawing up proposals for a corresponding extension of the STS rules and regulations.
All in all, however, the work of the three authors is an imaginative and knowledgeable contribution to stimulate the faltering discussion on the deepening of the European capital markets.