Wednesday 13 December 2017

European Commission wants to revive securitisation to create bigger debt markets

Commissioner Jonathan Hill addresses a news conference on the Capital Markets Union yesterday.
Commissioner Jonathan Hill addresses a news conference on the Capital Markets Union yesterday.
Donal O'Donovan

Donal O'Donovan

Europe is turning to the securitisation 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 on which companies can borrow - including through more so-called "securitisation deals."

The commission yesterday launched a three-month consultation due to end on May 13 ahead of the launch of an Action Plan it says will help unlock funding for start-ups an growing businesses.

A massive growth in securitisation, 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" securitisation 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 banks 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 to €17.5 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 securitisation in Europe, including bundled up mortgages and business loans was €1.4 trillion compared to €7.6 trillion in the US.

The commission 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.

That plan could ultimately involve efforts to harmonise the tax treatment of debt as well as insolvency regimes, however both are controlled at national level under EU treaties and differ widely across the EU.

Plans to boost securitisation is likely to prompt some controversy. The commission is considering loosening capital rules to make it easier for banks to bundle up debts but says it is not planning a return to boom era standards.

"We will not be going back to the bad old days of sub-prime mortgages," Jonathan Hill said.

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