Traditionally banks, not capital markets, provided credit to continental European business and commerce. Often they were closely integrated into local communities and politics. As a result, the region was particularly exposed when banks went missing in action during the crisis and slashed lending to businesses and households. The void created by weakened banks unable or unwilling to lend is already being filled by European corporate debt markets, which remain underdeveloped by US standards. In something of a gold rush, outstanding debt securities issued by non-financial companies grew at an annual rate of 14 per cent in December.
Before the crisis, Europe had a nascent market for ABS products backed by SME loans. In 2006, for example, there were 34 issues worth a total €46 billion, with Spain accounting for 15, according to Fitch data. ABS then fell into regulatory disapproval, but attitudes are turning again. At the start of this year, global regulators gave the higher-profile residential mortgage-backed securities market the seal of re-approval by including some in products banks could consider “safe” when building up liquidity buffers.
As part of its efforts to prop up Europe’s banking system, the ECB accepted such ABS as collateral in its liquidity-providing operations. So instead of being distributed, the modest quantities of ABS backed by SME loans launched during the crisis years have been retained by banks to obtain vital ECB funding.
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