According to the Wall Street Journal’s MoneyBeat column, Mario Draghi on Thursday said the European Central Bank (ECB) was working to promote a funding market for asset-backed securities, which allow banks to pool together shorter-term debt they have sold – such as car loans, credit cards, and residential mortgages – and sell those pools as a single package to investors.
This is welcome news.
Don't get me wrong – we need good and strong regulation to head off the absurd opacity and obfuscating complexity that contributed to the financial crash. But pure and simple securitizations are not what sank western economies; in fact they helped democratize finance and drive down the cost of capital for 40 years.
Both the IMF in its Global Financial Stability Report and some folks in the OECD have been talking about the need to support securitization to get banks lending again in the midst of recapitalization. The European Commission’s recent consultation paper on long-term finance raises the issue as well – good on them.
Securitization allows banks to focus on setting up loans rather than holding on to them long-term – which Basel III makes more difficult. By being able to quickly refinance through loan securitization they more quickly recycle their now smaller lending allocations – that velocity still allows more loans to be made.
At the moment, banks have hacked back lending to small-to-medium sized enterprise (SMEs). As WSJ says, without financing, these companies can’t grow: can’t hire employees, can’t invest in new projects. This is a serious problem in Europe, especially in the southern countries facing multi-year recessions and unemployment at depression levels.
The ECB wants asset-backed securities to be a sizeable source of bank financing that will encourage lending to SMEs. The WSJ reports that Draghi also alluded to the ongoing talk about European Investment Bank being used as a vehicle to supply credit to SMEs.
The Climate Bonds Initiative has been arguing that the EU (and other) governments should further listen to the OECD and bias their support for securitization towards green growth measures, for instance loans for SME energy efficiency measures and for green buildings. This has the benefit of supporting stimulatory lending in a jobs-intensive sector while also helping meet ambitious emission reduction goals.
Reaching emission reduction targets is a huge challenge; if we’re going to work to steer private capital in areas of public policy priority – the essence of the stimulatory task ahead of us – we need to have a constant and recurring bias to also addressing the over-arching challenge of climate change.
