The paper, “A missed opportunity to revive “boring” finance?”, critically examines the case for developing non-bank lending as a tool for financing the real economy. It recommends measures to address the systemic risks that some market financing channels may bring and looks at sustainable ways to deliver the European Commission’s agenda for growth and job creation.
- Download position paper (pdf, 100 pages)
- Download summary (pdf, 2 pages)
- Download cartoon (also available in French, German and Polish)
The Commission’s Long Term Financing initiative and forthcoming Capital Markets Union aim to help finance growth and jobs in the EU. They include a number of very promising initiatives such as promoting seed capital, crowdfunding and deepening bond markets.
However, other initiatives such as a revival of good securitisation may be detrimental to the public interest, in our view. Securitisation is a technique used to pool and repackage loans and sell them to investors. While some types of securitisation are sound, we recommend, among other things, that prudential definitions should discourage features such as tranching, credit enhancement mechanisms, reliance on credit ratings and excessive maturity transformation in good securitisations.
The paper considers how the financial sector could best support the EU’s economic revival, highlighting that moves to increase the central role of collateral in our financial system might have systemic consequences, that it is not certain that bank lending will decline, and questioning the need to change the European model to promote investment banking and capital market financing over traditional relationship-based banking.
Frédéric Hache, co-head of policy analysis at Finance Watch said:
“While much has been done post-crisis to address the risks of individual financial institutions, much remains to be done to address systemic risks. In this respect, it is essential to ensure that the type of securitisation that is promoted, and the increased role of collateral in our financial system that goes with it, do not create new risks.”
Benoît Lallemand, acting secretary general at Finance Watch said:
“The lessons from the crises are not that we need less banking and more capital markets, but that we need more well-capitalised traditional banks with robust funding structures and business models designed around the real economy.”
We hope that the current focus on growth and job creation will take into account the concerns identified in this position paper to ensure that the forthcoming Capital Markets Union and long term financing initiatives create inclusive, robust and sustainable growth.
To speak to Frédéric or one of the team, please contact:
The cartoon (see above) was drawn by the author of the report, Frédéric Hache, and may be freely distributed provided a credit is given to Finance Watch.
Further information on Capital Markets Union can be found here.
Further information on the EC’s long term financing initiative can be found here.
BIS on 7 December 2014 published a paper in its Quarterly Review: “Securitisations: tranching concentrates uncertainty”.
EBA on 14 October 2014 published a consultation “EBA consults on simple, standard and transparent securitisations and their potential regulatory recognition”, deadline 14 January 2015.