17 April 2024

Bankenverband's Quade: Looking to the future – optimising the production line for securitisations

This volume of funds can only be financed through an intelligent combination of available capital sources: businesses’ own funds, bank loans, capital market and public funding. In particular, more private capital must flow into the economy via the capital market.

In the coming years, European society will face the enormous challenge of rapidly advancing the green and digital transformation of the economy with investments worth billions of euros. The EU Commission estimates that the additional investment required will be 620 billion euros – per annum. This volume of funds can only be financed through an intelligent combination of available capital sources: businesses’ own funds, bank loans, capital market and public funding. In particular, more private capital must flow into the economy via the capital market. Without a strong capital market, the green and digital transformation will simply not succeed.

Banks can play a key role as intermediaries between the businesses that need financing and the capital market. In line with the needs of investors on the capital market, banks can put together financing through loans that match the investors’ risk profiles. This means that banks can generate investments that are not accessible via the capital market. At the same time, this can free up capacity for banks to grant further loans. And the instrument that is most suitable for doing this is securitisation. Securitisations are an important instrument for managing both the capital and liquidity of a bank.

As a result of the 2008 financial crisis, European securitisations were unjustly discredited. This is clearly demonstrated by the very low default rates of European securitisations before, during and after the crisis. Nevertheless, in Europe, there is a stigma surrounding securitisations, which played a key role in the 2008 financial crisis. Even the introduction of comprehensive regulation has done little to change this. Rather, what we are seeing is that although the original objectives for regulating securitisations were well thought through, they are now being forgotten about in the legislative process. The result is excessively conservative and sometimes impractical requirements.

At the same time, the discussion about revitalising the securitisation market is often focussed on the US. However, a direct comparison of the US and European securitisation markets is only useful to a certain extent. The two securitisation markets function in fundamentally different ways. The US model of ‘agency securitisation’ (Fannie Mae, Freddie Mac, Ginnie Mae) is not the way the securitisation market works in Europe. The majority of the US securitisation market is conducted through US agencies (securitisation of residential real estate financing). In so doing, these government institutions assume all or some of the credit risk. The investor then bears, in particular, any risk from changes in the interest rate. Excluding agency securitisations, the volume of US securitisations issued in 2022 was only four times that of the volume of securitisations placed in Europe.[1] Due to these differences, it is problematic to base an assessment of the European securitisation market on the US securitisation market.[2]

The Association of German Banks has conducted a comprehensive analysis of proposals developed in recent years to improve the regulation of securitisations. The findings show that no single proposal on its own would bring about a breakthrough to revitalise the securitisation market. Instead, some adjustments need to be made in a number of areas. The key aim of all these adjustments must be to make the securitisation process as a whole more efficient. This also means not focussing solely on regulatory requirements. Other areas of the production line, such as supervisory processes or market practice, offer scope for further opportunities for improvement....

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