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>> See: capital markets, SME lending
BRUSSELS, 11 May 2016 – Capital markets can only complement the role of bank lending, according to the May edition of ESBG Positions, an EU banking policy reference updated regularly by the Brussels-based association.
Although the European Commission insists that the Capital Markets Union (CMU) will aim firstly at benefitting small and medium-sized enterprises – the backbone of the EU economy – those benefits will be limited to specific market segments such as start-ups or established companies that might be tempted to switch from bank financing to capital markets financing. The European economy – especially in markets strongly based on SME structures like the majority of continental Europe – would not benefit from favouring funding from capital markets over traditional bank lending, it argues. Policy that complements, not substitutes bank lending from the capital markets model is the best path to create a more competitive European Union.
CMU and other policy topics contained in the quarterly publication were presented at a dialogue event with members of the European Parliament today in Strasbourg.
Representing 26 members in 20 countries in Europe, ESBG places particular focus on securitisation, part of a set of CMU-related proposals being debated. ESBG supports the European Commission's proposal to develop criteria for identifying simple, transparent and standardised securitisations and shares the view that a functioning securitisation market – supplementing bank loans as a main financing instrument – is essential to support economic development, and for providing sufficient credit to companies, particularly to SMEs. This is especially true where banks require a complementary, functioning market that allows them to boost lending, in the event of higher credit demand by corporate borrowers, beyond their capacity of on-balance-sheet lending within the scope available under the Basel III regime.
The European Commission's proposal excludes synthetic securitisation – an important part of the securitisation market necessary for the banking system to place parts of their credit risk exposure to professional investors. Synthetic securitisations are particularly suitable for this purpose, since they only require comparatively straightforward contractual agreements – and no full transfer of title of the underlying loan receivables. There exclusion would negatively affect banks whose clients are SMEs preferring bank loans – leading to competitive distortions. Instead, the focus should always be placed on the benefit of a form of financing for the real economy. Financing that constitutes a simple, transparent and standardised securitisation should not be determined on the basis of the type of funding alone.
In addition, the proposed reduced risk weights for qualifying securitisations will be considerably higher than today. Even a reduction from 15% to 10% for qualifying securitisations would mean an increase of the floor from 7% to 10% compared to the current situation. Left unchanged, these rules would substantially reduce the incentives for banks to participate in securitisations and consequently undermine the role securitisation could play in funding Europe's real economy.
ESBG supports the proposal's objective of reducing the burden on issuers while safeguarding a high level of investor protection and considers the proposal to be an important step towards the CMU. ESBG especially welcomes the aim of facilitating the approval process for frequent issuers.
Further work might be needed, however, in respect of other issues such as the alignment with the PRIIPs regulation. In addition, there are other parts where the proposal is on the right track, but could be more ambitious. This concerns especially the universal registration document regime, introduced by Article 9 of the proposal. ESBG backs strongly the concept, but does not believe that the approach goes far enough to be of much use. Further reflection should be made on which cases the requirements are counter-productive and hence should not apply, in particular for small-scale credit institutions.
Achieving common harmonisation of covered bonds presents many challenges, highlighted by the diversity of legal frameworks in the EEA, including insolvency and mortgage legislations across the European countries. Many EU countries have already succeeded in establishing sound regulated covered bond markets. If there is to be a common European regulatory framework, this must build on best practice among national regimes, be in compliance with international standards while not causing disruption to well-oiled markets.
Expanding the categories of eligible asset classes beyond public sector loans as well as residential and commercial mortgages may lead to the dilution of the covered bond concept. This may in turn reduce confidence in covered bonds and reduce the attractiveness of the instrument for investors, issuers and government institutions.
Sound coordination between the legislative framework on securitisation and the other initiatives within the CMU Action Plan is important, as the regulatory regimes must adequately reflect the different risk-return profiles between securitisation and covered bonds.
Updates to the May ESBG Positions document include the following topics: