Saturday 24 February 2018

Europe turns to securitization market to kick-start economy

Lehman has almost $20bn in cash and a monthly payroll of up to $45m for managers and advisers. Photo: Bloomberg News
Lehman has almost $20bn in cash and a monthly payroll of up to $45m for managers and advisers. Photo: Bloomberg News

Donal O’Donovan

Europe is turning to the securitization market that was widely vilified in the wake of the financial crisis in the latest effort to kick start an economic recovery.

The European Financial Markets Commissioner says Europe needs a single capital  market for companies to borrow on – including through more so called “securitization deals.”

The Commission has launched a three-month consultation round ahead of the launch of an Action Plan it says will help unlock funding for start-ups an growing businesses.

A massive growth in securitization, where investment banks bundle up masses of business loans to borrow against on the bond market was widely blamed for tipping the world into a financial crisis back in 2007. 

But greater access to what he said would be “high quality” securitization is among EU Commissioner Jonathan Hill’s proposals to boost the creation of a single capital markets union (CMU).

In practice larger companies across Europe have access to bond and equity capital markets, either nationally or in many cases by tapping into the City of London’s banks.

Across much of Europe smaller businesses have limited access to finance other than from their domestic banks, with bank’s accounting for 75pc of lending.

The US is far less reliant on banks to finance industry.

Stock market capitalisation in 2013 totalled €11.5 trillion in the Europe Union, compared with €17.5bn trillion in the United States. The two economies are roughly the same size, meaning the borrowing needs of industry should be similar.

When it comes to borrowing the difference are even greater. The so called high-yield market for relatively risky corporate debt in Europe is half the size of its US. counterpart. Although new figures yesterday show that the European market is growing rapidly – filling a gap left by shrinking banks.

The outstanding stock of securitization in Europe, including bundled up mortgages and business loans was €1.4 trillion compared to €7.6 trillion in the US.

It said that if European markets were as developed as those in the US there would have been an additional €90bn available to companies between 2008 and 2013, even after the so called “credit crunch”.

The Commission said it wants to “clear obstacles that are preventing those who need financing from reaching investors” and make the system for channelling those funds – the investment chain – as efficient as possible.

 

 

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