Realistic View of European Securitizations Necessary
Research
08.08.2024
ZEW Researchers Call for Improved Conditions for Green Investments
In the face of pressing global challenges, especially climate change, companies need to invest more in transformational projects. Against this background, a better integration of the banking system and capital markets in Europe is crucial. The mobilisation of private financial resources, for example through securitization, is essential for this economic transition. Securitization is the bundling of financial claims or assets into tradable securities.
The new EU Commission has an important task, i.e. to take forward the Capital Markets Union (CMU). Efforts to strengthen European capital markets, including securitization markets, have made little progress in recent years. A study by ZEW Mannheim examines the market potential of securitizations in Europe and finds that current expectations are unrealistically high. The authors emphasise that while securitization is important for better linking the European banking system to the capital markets, this alone cannot drive the green transition. Policymakers should therefore focus on creating the necessary conditions for investments in the real economy.
“Compared to green bonds, green securitizations offer institutional investors the opportunity to directly finance green projects. This is particularly interesting in terms of climate risk management and climate reporting. However, it is questionable whether banks will want to securitize and sell green loans in the short to medium term. First, banks need to become greener themselves. Second, selling loans via securitization is only attractive for banks if the lending opportunities exceed what they can manage with their own equity capital,” says Dr. Frank Brückbauer, a researcher in ZEW’s “Pensions and Sustainable Financial Markets” Unit. “To accelerate the green transition, policymakers must first encourage the necessary private real investments by creating a favourable economic environment and the right incentives, such as appropriate CO2 prices or subsidies for developing green technologies. The financial sector will then provide the necessary financing,” explains Dr. Karolin Kirschenmann, deputy head of ZEW’s “Pensions and Sustainable Financial Markets” Unit.
Market potential of European securitizations hard to assess
The authors stress that the current market potential of European securitizations cannot be assessed based on comparisons with the pre-crisis market size or with the US market. Since the financial crisis, European securitizations even with the highest possible ratings have no longer been seen as safe assets and belong to a different, smaller market segment. Comparisons with the US market can be misleading as it is dominated by mortgage-backed securities with government guarantees. Excluding these, the US market is still significantly larger, but the gap – and thus the EU market’s potential for catch-up growth – is much smaller. Policymakers should therefore be more realistic about the market potential of European securitizations.
Securitizations for accelerating green transition are not a sure-fire success
The analysis also shows that loans to small and medium-sized enterprises (SMEs) and households are crucial for the green transition in terms of linking the banking system with the capital markets via securitization. However, the securitization of SME loans is challenging, in particular due to the need for detailed information on the environmental impact of the underlying loans. SMEs must therefore be willing to provide the information needed to meet the requirements of capital market investors. Compared with securitizing loans to households to improve the energy efficiency of their homes, covered bonds already provide banks with a cheaper structured finance instrument.
The authors conclude that neither asset class is a clear candidate for creating cross-border securitization markets as envisaged by the CMU and wished for by policymakers. Overall, the narrative of the CMU’s model to revive European securitization markets does not seem very realistic.
