Frankfurt – Mortgage lending bundled with bundles triggered the global financial crisis in 2008. Such securitisations are barely traded in Europe. That’s what the European Commission wants to change. Securitization, it is said, is better than its reputation and an important pillar for financing the economy. Financial Stability Commissioner Jonathan Hill wants to put the odds and risks in a reasonable relationship with the bill expected this Wednesday – a complicated exercise.
News / Finance
Picture: © ElenaR / fotolia.com / Text: dpa-AFX
“The basic idea of a securitization is a good one: a bundle of claims is converted into marketable securities and placed on the capital market,” wrote Bundesbank CEO Andreas Dombret recently in a guest contribution for the “Börsen-Zeitung”. Banks can thus bundle and resell loans. For this, they automatically have to reserve less capital for possible defaults and can instead lend new loans. Even the well-known as a financial market critic Green MEP Sven Giegold can win such papers something. He said his group was in favor of simplifying simple structured securitisations.
However, the business was exaggerated before the financial crisis – especially in the US. Loans of questionable quality were increasingly being lent, packaged and distributed in the financial system in such a way that risks were barely recognizable. Then, when many homeowners could no longer service their loans, the bubble burst and the severe financial crisis took its course.
The shock continues in Europe to this day. According to data from the European financial market association AFME 2008, asset-backed securities totaled 815 billion euros, compared to just 217 billion last year, despite the European Central Bank’s ultra-loose monetary policy and its billion-dollar buy-up program includes securitisations. By contrast, the market in the USA has stabilized long ago.
In the opinion of experts in Europe, there have never been such excesses as in the USA. “No scrap was ever packed here,” says Allen & Overy law firm securitization expert Stefan Henkelmann. Federal banker Dombret points out that failure rates of securitized US residential mortgage loans were between 3 and 15 percent, in Europe at most one percent. European securitization had “not the slightest” to do with the outbreak of the financial crisis, therefore concluded the head of the German securitization organization True Sale International, Hartmut Bechtold.
And yet the market is in crisis. Many banks have thinned out their department or withdrawn completely from this market – also because of the tightened after the crisis rules.
A source of financing for the economy has thus largely dried up. With his first major legislative initiative, Hill’s Financial Stability Commissioner, which has been in office since November, wants to get the market back on track. The move is a foretaste of the much larger Capital Markets Union project in Europe, designed to facilitate cross-border financial operations in Europe.
“The focus is on regaining confidence in a market and only to a limited extent in preventing a new financial crisis,” said securitization expert Stefan Schütt of the business consultancy BearingPoint. Decisive for the success were contradictory, comprehensible rules for the complex market.
Now the capital requirements for securitisations are to be lowered. However, this only applies to papers that receive the seal of quality “Simpel, Transparent, Standardisiert” (STS) from the EU. In order to avoid disincentives, it should remain with the so-called deductible introduced after the financial crisis. Accordingly, lenders must retain at least five percent of their own books from a bundle of credit.
The EU wants to ensure that banks continue to pay close attention to the quality of credit. To exclude that securitization to a garbage dump for poison paper, politician Giegold considers the quota but too low. He suggests for more complex instruments 15 percent self-retention, the former Bundesbank Board Franz Christoph Zeitler argues for a similar rate.