Tuesday

21st Nov 2017

Analysis

Plan to 'revitalise' complex financial products lacks clear target

The European Union is trying to “revitalise” a market for controversial financial products, but one of the goals appears to already have been achieved without the EU's help.

Securitisation is the packaging of loans, mortgages, or other contractual debts into securities that can then be sold on the market, together with the risk attached to those debts.

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  • Securitisation is the packaging loans, mortgages, or other contractual debts into securities that can then be sold on the market, together with the risk attached to those debts. (Photo: Cory Doctorow)

It had an instrumental role in the financial crisis of 2008, but the European Commission says giving the securitisation market a boost can help the real economy.

The commission has not given a target figure of when “revitalisation” will have been achieved, but spoke in a press release of going back to the “pre-crisis average”.

The commission did not want to comment on the record, but one commission official said that if the market would return to average pre-crisis issuance levels, this would generate €100-€150 billion in additional funding for the economy.

“This would already be a major achievement for the securitisation markets,” the commission official said.

EUobserver looked at how average issuance levels have done so far, and found that more securities have been created through securitisation since the crisis than before the crisis.

This website collected data from the Association for Financial Markets in Europe (AFME), a lobby group for the financial service sector, and the Securities Industry and Financial Markets Association, its US-based counterpart.

Taking a very narrow view, the "pre-crisis" years are 1996-2006. The average issuance of securities in Europe was €168 billion.

When including 2007, the average was €203 billion. When including 2008 – when the financial crisis was in full swing – the average was €251 billion.

(Photo: EUobserver)

Last week, AFME released data for the third quarter of 2016. The first three quarters of 2016 were the best three quarters since 2012.

Taking the most recent data into account, the average annual issuance of securitisation since 2009, is €270 billion.

Last year the figure was €216 billion.

Even when correcting for inflation, the post-crisis period is already better than the pre-crisis period.

Converting the averages to today's prices, the average since 2009 is €282 billion, compared to a 1996-2007 average of €244 billion.

One could, therefore, argue that securitisation has on average already reached pre-crisis levels again.

But according to Anna Bak, a manager at the securitisation division of AFME, the financial sector lobby group, looking at the creation of securities is not enough. They also need to be sold.

“The commission's securitisation proposal will be a success when we see a trend towards more securities being placed on the market in Europe,” Bak told EUobserver.

In recent years, financial institutions have bundled loans, mortgages, or other contractual debts, but often kept them on their balance sheet, instead of selling off the risks to those debts.

“A lot of securitisation done today is done by banks to obtain collateral, to be eligible for ECB credit,” said Bak, referring to the European Central Bank. Collateral is something a lender can seize if the borrower does not pay back a loan.

The EU commission official, who would speak only when not being named, also noted that “while in 2007 69 percent of issuance was placed, today only 35 percent is placed, the rest being retained by issuers”.

“The market has not revitalised itself, it is instead stuck to issuance levels of the early 2000s,” the official noted, indicating that these levels are apparently too low.

'Helpful' to small businesses

The commission has argued that securitisation would help small and medium-sized enterprises (SMEs), although former capital markets commissioner Jonathan Hill acknowledged it had no concrete evidence of that.

Indeed, a regular survey of the ECB said in November that access to capital is a decreasing concern for SMEs. They are more worried about other challenges, like finding customers and the cost of production and labour.

Yet AFME still thinks securitisation can help.

“Securitisation is not going to solve all problems, but it is helpful. It should not be banned or treated as toxic waste,” said Bak.

Interview

MEPs wary of small print in EU securitisation bill

Paul Tang, the Dutch economist and MEP shepherding through the EU's securitisation bill, casts doubt on claims the risky sector can bring EU states an extra €100 billion.

EU public lacks voice on banking laws

The complexity of financial laws and lack of NGO resources means the “man in the street” has little say on EU banking regulation, the EU Commission has warned.

EU wants to fast-track the capital markets union

The European Commission says that Brexit and the loss of the City of London, the EU's main place for finance, is a reason to accelerate the integration of the bloc's financial markets.

MEPs ponder how to fight tax havens

After the Paradise Papers brought new revelations about tax dodging across the globe, including in the EU, the European Parliament wonders how to step up the fight.

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