The European securitization market’s long stay in the capital markets doghouse could soon come to an end if a push by German and French governments for friendlier regulation succeeds. But any changes may prove to be too little, too late for structured finance to reach its potential as a major support for the EU’s Green Deal vision.
GlobalCapital reported on Friday that the German and French governments had privately urged the European Commission to reconsider the harsh regulatory treatment that securitization receives. After over a decade of what many market participants consider “punitive” regulations, the letter was something of a pleasant surprise.
The challenging broader economic backdrop provides some clues as to why the dramatic shift is taking place. The long flow of cheap money through the ECB’s quantitative easing programmes is beginning to end, and programmes like the TLTRO are not as easily accessible as before. European banks will therefore need to explore other financing routes.
Securitization, to quote the French and German governments, is “under-used”. They would appear to want to add a string to the funding bow of their financial institutions.
It is a particularly crucial move in the context of the EU’s Green Deal programme, through which the bloc aims to become the first “climate-neutral” continent by 2050. Several key initiatives around finance, energy and transport have a deadline of 2030, but the war in Ukraine, knock-on problems in energy, and concerns of a Eurozone-wide recession threaten to slow green momentum — if banks’ ability to lend is impaired.
To facilitate the Green Deal, the EU Commission has made a number of pledges, including to “mobilise” €1trn of sustainable investments by 2030. In climate, it is looking to reduce net greenhouse emissions by 55% by 2030, which is heavily dependent on energy consumption. Buying new petrol and diesel cars will effectively be banned by 2035.
With its ability to finance the real economy, securitization has frequently touted itself as a major tool in meeting ESG targets. Indeed, in the US and China it is a key element, accounting for 50% of all US green bond issuance and 11% in China. In the EU, it amounts to just 1%.
Time running out
The problem is that 2030 is not that far away. Even if loosening the regulatory demands on securitization proceeded at relative breakneck speed, it might mean agreeing reforms in, say, 12 to 18 months. Then there would be time required for market participants time to acclimatise.
In this best-case scenario (and market participants are rightfully sceptical there’ll be any quick progress), 2030 will be less than five years away by the time any apparent efforts to reignite an essentially dormant market take effect.
In reality, these processes are never fast. Politics can get in the way, there will have to be compromises to placate less enthusiastic partners, and other challenges like the war in Ukraine or persistent inflation could slow the process further.
A complex market such as securitization is not a tap that can be switched on and off at a moment’s notice and expected to flow as freely as before. Take solar ABS as an example. It may be fashionable now to talk up prospects of a thriving solar ABS market, such as the one that exists in the US, but this did not appear out of thin air. Government incentives and strategies developed the market gradually over a decade.
Gradually developing and perfecting the European securitization market should have happened a long time ago, so this long-awaited shift — though exciting — is bittersweet. Let’s hope it’s not too late.