The ongoing debate on securitisation in the EU, and how to move it forward

The debate on “securitisation” has been ongoing in the EU for … a long while.

This time it arguably restarted with a reference in the mission letter from President of the European Commission Ursula von der Leyen to nominated Commissioner Maria-Luis Albuquerque. Now, the idea to revive/resuscitate (depending on where you sit on the political spectrum) securitisation is at the top of conversations on what a “Savings & Investments Union” should look like.

A good idea? Yes. As the Jacques Delors Institute points out, securitisation will allow banks to “free up capacity on their balance sheets and tap into alternative sources of financing”. Securitisation will allow banks to take on more risks and ultimately to lend more. A lot more. €1 trillion more. 

Is it the best idea? “Good, better, best” is easier to assess in sports than in economics. True, risk is a crucial part of any investment process, and we as Europeans will all have to (re)learn the lesson that not taking any risk is the best way to put yourself in danger.

At a time where not one but two former Italian Prime Ministers are calling the EU to wake up from its slumber, it seems obvious to promote the ability of the largest EU institutions (by far) to perform their role as investors in the real economy.

This is especially true since banks play a much more significant role in the EU than they do in, for example, the US – and that the US has implemented Basel in a “different” way. By “different”, one may either read less strict or smarter, again depending on your place on the spectrum.

So why is an association which has “Invest” in its name not rallying to the cause and calling this the best idea since sliced bread? Well, while bank lending can – and should - do a lot for the EU’s current needs, it cannot – and will not - do everything. 

Just take it from the man of the hour - and multiple Eurozone saviour – Prof. Draghi. The once nicknamed Super Mario mentioned in his much talked about report that banks are “less well-suited to fund inno¬vative projects”, and that it was primarily in innovation – and the ensuing productivity – that the EU was lacking the required power to compete with the US and China.

If securitisation will help banks to lend in well established businesses, that is great! But it is unlikely to transform banks into major actors of the innovative economy. You don’t use securitisation to commit capital to innovative start-ups and scale-ups. For this, you need equity.

What can help the entire EU economy – and banks as major players in that economy – is looking at the full spectrum of what role banks have and should have. And take the securitisation debate as an opportunity to also revise the capital charges for equity investments as well. This to allow banks to invest in those funds that finance innovation. Banks represent barely 5% of the overall investments in private equity and venture capital alike, roughly averaging six times less than pension funds and two times less than insurance companies. For institutions whose total assets by far exceeds our GDP, this is isn’t unsliced or even half-baked bread: it’s not getting the bread out of the oven at all. 

We should stress that it is not banks that are to be blamed for this. EU legislation has – to an extent - rightly focused on banks being as safe as possible. But there is an argument, which has been helpfully revived by the securitisation debate, that banks have a role to perform as financiers of – and investors in - the “real economy”. It is only a shame that this debate currently only centres around securitisation, as if banks were no longer seen as anything but lenders. 

Recent Solvency II debates and amendments of the “long-term equity category” have shown that it is possible to make insurance companies investors again - without putting the very spirit of a risk-based approach into question. There is a wide array of economic studies that show that it is equally possible to do the same for banks, without tampering with the laudable fundamental principle of Basel regimes of keeping banks safe. 

Not addressing the investment side of banks’ balance-sheets would neglect the real needs of the European economy. As we live in a bank-centric economy, restricting banks’ investments in equity means we will fall perpetually short in terms of investment compared to other capital markets-based economies.

The European Commission, Member States and Members of the European Parliament do not have to choose between securitisation and equitisation of the banks’ portfolios. Both can be done - and that would elevate a “good” idea to a “better” idea.