Europe must kickstart securitisation to reboot its stuttering economy

Richard Woolhouse
Germany's economy is still motoring ahead

WHEN the IMF revised down its 2014 growth forecast for the Eurozone last week, it felt like a sad refrain rather than a surprise. GDP in the single currency bloc is now expected to grow by just 1 per cent this year. This average masks wide variations across the 18 member states. Germany’s economy motored along in the first quarter of this year – France’s stalled and Italy’s was stuck in reverse. It’s a familiar lament. Economic growth in Europe has disappointed for decades.

I can understand that, in the wake of the financial crisis, policymakers focused on building a more stable financial system. But now that job is largely done, it’s high time for the agenda to move on to the next phase – promoting economic growth.

That’s why today the BBA is setting out our 12-point plan on how to boost growth across the continent. The most topical set of recommendations relate to measures designed to kickstart the European securitisation market. Securitisation involves the packaging of loans – such as SME loans or mortgages – which are sold on to investors.

This process lets banks free up their balance sheets and diversify their sources of risk. In Europe, the market needs to be rebooted. It has been virtually dormant for the last five years despite the impressive performance of these assets during and after the crisis.

But the underlying mechanism is not the issue – it is more how it is conducted. We need to see the development of simple and safe structures – not those that are complex or opaque.

There needs to be a single consistent definition for “qualifying securitisations” and there should be regulatory changes to the capital and liquidity treatment of those assets. This will help make them more attractive to hold and increase the demand for such assets among end-investors. This will free up balance sheets and allow banks to lend more to SMEs.

Securitisation could be a “financing vehicle for all seasons”, one senior policymaker at the Bank of England has said.

Our report also suggests ways to promote infrastructure investment, exports and SME financing. Regulatory barriers that hinder long-term investors should be removed. The European Investment Bank should be strengthened.

Companies should be helped to export, particularly to emerging markets, by making trade finance cheaper, more widely available and more flexible. SMEs should be helped to access finance by promoting alternatives to traditional debt finance.

Finally, the financial system should diversify away from a reliance upon bank loans and overdrafts and to embrace other forms of debt and equity financing. This will provide more choice in terms of financing and allow different businesses to access the right finance at the right time.

These ideas represent a practical programme to support European growth. Its implementation would not just be good news for the 330m residents of the Eurozone. With the European Union our largest export market, it would also be highly advantageous for us Brits too.

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