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08.08.2024 10:00
A realistic view of European securitisation is necessary
In view of the pressing global challenges, particularly climate change, companies must invest more in transformative projects. Better integration of the banking system and capital markets in Europe is crucial. In view of the transformation of the economy, the mobilization of private finance must be promoted, for example through securitization. Securitization is the process of bundling financial claims or assets and converting them into tradable securities.
The new EU Commission has a major task ahead of it: it must advance the capital markets union. The plan to strengthen European capital markets, including securitization markets, has made little progress for several years. Against this background, a recent study by ZEW Mannheim examines the market potential of securitization in Europe. It comes to the conclusion that current expectations are unrealistically high. The authors emphasize that securitization is an important instrument for better connecting the European banking system to the capital markets, but cannot in itself be the major driver of the green transformation. Politicians should instead concentrate on creating the necessary conditions for investments in the real economy.
“Compared to green bonds, green securitizations offer institutional investors the opportunity to finance green projects directly. This is particularly interesting from the perspective of climate risk management and climate reporting. It is questionable, however, whether banks will even want to securitize and sell green loans in the short or medium term. Firstly, banks themselves must become greener. Secondly, selling loans via securitizations is only interesting for banks if the opportunities to grant loans exceed what they can and want to do with their equity,” says Dr. Frank Brückbauer, scientist in the ZEW research department “Pension Provision and Sustainable Financial Markets”. “In order to accelerate the green transition, politicians must first promote the necessary private real investments by creating a favorable economic environment and the right incentives, for example through appropriate CO₂ prices or subsidies for the development of green technologies. The financial sector will then provide the appropriate financing,” explains Dr. Karolin Kirschenmann, deputy head of the ZEW research department “Pension Provision and Sustainable Financial Markets”.
Market potential of European securitization difficult to assess
The authors emphasize that the current market potential of European securitization cannot be derived from a comparison with the market size before the financial crisis or with the US market. Since the financial crisis, European securitizations with the best ratings are no longer seen as safe investments. They therefore belong to a different, smaller market segment. Comparisons with the US market can be misleading, as this is dominated by real estate loans with explicit government guarantees. If these are excluded from the comparison, it becomes clear that the US market is still significantly larger, but the difference – and thus the catching-up potential for the EU market – is significantly smaller. Politicians should therefore assess the market potential of European securitizations more realistically.
Securitization for the green transformation is not a sure-fire success
The analysis further shows that loans to small and medium-sized enterprises (SMEs) and households are of key importance for the green transformation when it comes to better linking the banking system and capital markets through securitization. However, the securitization of SME loans is a challenge, particularly in view of the need for detailed information on the green impact of the underlying loans. It is therefore important that SMEs are willing to provide the necessary information in order to meet the requirements of capital market players. Compared to securitizing loans to households to improve the energy efficiency of their homes, banks already have a more cost-effective instrument for structured financing with covered bonds. Covered bonds offer a cheaper financing option than securitizing such loans.
The authors therefore conclude that both asset classes are not clear candidates for the creation of cross-border securitisation markets as envisaged by the Capital Markets Union and desired by policy makers. Overall, the narrative of the model envisaged in the Capital Markets Union for revitalising European securitisation markets does not seem very realistic.
Scientific contacts:
Dr. Karolin Kirschenmann
Deputy Head of the Research Department “Pension Provision and Sustainable Financial Markets”
Telephone +49 (0)621 181-351
E-Mail karolin.kirschenmann@zew.de
Dr. Frank Brückbauer
Scientist in the research area “Pension provision and sustainable financial markets”
Telephone +49 (0)621 181-148
E-Mail frank.brueckbauer@zew.de
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