Why is Europe Surprised? A World without Securitization

Over the last few weeks there have been a series of articles detailing the growing concerns about the seemingly accelerating rate at which European banks are adopting the new Basel III capital and liquidity rules.  Phrases like “aggravating the region’s economic woes” and ” the unintended consequences” are being thrown around liberally.  As a result of this migration towards the “new normal” in global bank capital standards, many are fearing that any chance at even a modest recovery in the Euro zone will soon be choked-off.

What we don’t understand is why anyone is surprised by any of this.  Surprised?  Really??

Without a robust securitization market to absorb the excess demand for fairly priced capital, not just in Europe but for the global economy, the markets continue to struggle.  It’s just that more evident in Europe than it is in the US for several reasons.  Two interdependent phenomenon that come to mind are:

1-  The European securitization markets were never as well-developed as their US counterparts, even before the Credit Crisis.  The “junior” status of this market was due to several factors, perhaps the most significant of which was the varied commercial and property laws and regulations throughout Euroland which made the whole process of securitization that much more complex.

2- Partially as a result and throughout the boom years, the European market had a disproportionate over-reliance on traditional bank lending for capital and now it appears that the bird has come back to roost.

So, what we now have is perhaps the clearest example of the consequences associated with forcing banks to de-leverage while simultaneously shutting off the securitization market.  No matter how you slice it, something has to give and that “give” quite naturally points to a contraction of the European economy.

Unfortunately, many market regulators (see the US Federal Reserve in a recent commentary) are still pointing to the scary specter of the “Shadow Banking System” like it is some close relation to Freddie Krueger.  This, of course, is where securitization operates; outside the banking system and “off” the balance sheets of the banks.  We could not disagree more with those who suggest that allowing non-bank investors into the capital markets via securitization is a bad thing.

The answer to this mess remains the restoration of structured finance as the most pragmatic and successful way to allow non-banks to participate in the funding of the “global balance sheet”.  Too many companies chasing too little credit in a “bank only market” is a recipe for disaster.  We hope that the ECB takes the first step in the right direction very soon by allowing banks to utilize high quality ABS and MBS securities against their short-term liquidity ratios.

We believe that just as the current conditions are pointing towards the need to restore securitization, allowing banks to utilize ABS and MBS securities to meet liquidity requirements will reinforce the fact that securitization actually does work and is distinctly and morally beneficial to the global financial system.

About markferraris
Managing Principal Orchard Street Partners LLC

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