Finalizing the EU's capital markets union project would give critical impetus to the European securitization market, helping to fund sustainable projects and usher in more consolidation in the bloc's financial sector, according to the CEO of the Association of German Banks.
The EU is trying to develop a capital markets union, or CMU, to reduce companies' reliance on bank financing and to encourage retail investors to put more of their money in bonds and shares instead of savings accounts. This would lead to more diverse funding options for companies and buoy the wider economy.
Securitization — whereby assets are transformed into tradable securities — has been controversial, due to the role it played in the global financial crisis, but is a key part of the CMU. A more developed market would provide more liquidity to the wider financial system, which is crucial at a time when financing needs for sustainable projects are growing, and bank regulation is tighter, the association's CEO Christian Ossig told S&P Global Market Intelligence.
Ossig, who was speaking on the sidelines of a conference in Brussels, is also working with a newly formed group, Markets4Europe, created by former central bankers and finance ministers, banking associations and financial institutions including Allianz Group and Euronext NV, to speed up the implementation of CMU.
"The framework we have for securitization today is not enough in today's world — we need to encourage synthetic securitization," he said.
Synthetic securitization allows credit risk to be transferred, and for regulated financial institutions to lower their capital requirements.
Securitization would be a way to bring banks "balance sheet relief" from future regulation, Ossig said.
Sustainable financing
It could also help finance sustainable projects, Ossig said. He estimated that the European economy needs an additional €180 billion to €250 billion for sustainable projects.
"We need to revisit [securitization], especially in a world where we need financing for sustainable projects," he said. "The instruments we have for those funding needs are not in place today."
But more securitization is just one facet of a successful capital markets union, he said. Other more complicated issues involve the harmonization of insolvency laws and taxation across EU countries.
"What is missing is a strong political will," he said. "I doubt ... on the member state level that the commitment is really there."
In principle, countries are supportive, but when it comes to details they are often reluctant to make the required changes, he said.
Consolidation
A capital markets union, and the harmonized market that it would bring, could also open the door to increased consolidation over the longer term.
Regulators have been pushing for more cross-border M&A among European lenders in order to make them more competitive against rivals in the U.S. and elsewhere.
Currently, the balkanization that exists in many fields of capital market activities means there is "very limited" economic rationale for such deals.
"One dimension of CMU is cross-border integration, and if you have similar pension products in member states, then there is an increasing economic rationale for banks to become active cross-border," Ossig said.
