And the winner is….
The 2025 Ieke van den Burg Prize for research on systemic risk has been awarded to the paper entitled “Better be careful: the replenishment of ABS backed by SME loans” by Arved Fenner, Philipp Klein and Carina Schlam. This Prize is decided upon by the Advisory Scientific Committee of the ESRB and is targeted at junior researchers. As previous winners, this paper addresses an important systemic risk topic, relevant for analysts and policymakers alike.
Securitisation has again moved to the top of policymakers’ agenda in Europe. So, understanding how the sausage is being made, i.e., which loans make into the pool, is important. Contrary to ]general opinion, securitised loan portfolios may change their composition after being taken off from banks’ balance sheets. For asset-backed securities (ABS) backed by SME loans in particular, the reason is that the time to maturity of ABS is usually much longer than that of the underlying loans. Thus, banks need to reinvest the released capital arising from the borrowers’ repayments and transfer further loans to the securitised loan portfolios after the transactions’ closing. This is known as portfolio replenishment.
The authors study the replenishment of 102 ABS backed by more than 1.7 million small- and medium-sized enterprise loans. Based on granular data from 2012 to 2017 obtained from the central loan-level repository for ABS in Europe, the authors show that loans added to securitised loan portfolios after the transactions' closing perform worse than loans that are part of the initial portfolio. On average, loans added to securitised loan portfolios demonstrate a 0.42 percentage points higher probability of default. The authors provide evidence that originators exploit their information advantage vis-à-vis investors by deliberately adding lower-quality loans to securitised loan portfolios. On the other hand, this adverse behaviour can be mitigated (i) by originators' reputation efforts, i.e., by originators wanting to return to the market and thus aiming at building a reputation,(ii) by increasing transparency in the ABS market, as for example per the European Central Bank's loan-level initiative, and, most effectively, (iii) by the interaction of reputation efforts and transparency.
24. June 2025
Capital market union – is third time the charm?
Two weeks ago, the Florence School of Banking and Finance organised a joint conference with the European Stability Mechanism in Luxembourg on Savings and Investment Union – bringing capital markets to people and firms. The concept of a Savings and Investment Union (SIU) replaces that of a Capital Market Union (CMU), that has gone through two not very successful attempts. However, SIU is also broader than that of a CMU as it can be seen as comprising both banking and market/non-bank finance.
The first day was focused on academic studies related to capital market integration while the second day to policy panels. Here are some of my take aways.
First, the Savings and Investment Union (SIU) is not about increasing savings in the EU; it is not necessarily about increasing investment (though completing the Single Market in Goods and Services and reducing red tape might also offer additional investment opportunities). Rather, it is about improving intermediation efficiency, with positive effects on innovation, productivity growth and economic growth. This is in line with the financial intermediation-growth literature that has shown that the relationship between financial development and economic growth works through more efficient resource allocation and productivity growth rather than capital accumulation and higher savings (see e.g., my old paper from 2000, with Ross Levine and Norman Loayza). While the aggregate savings rate in the EU is much higher than in the US, a large share of its saving is channelled to investments outside the EU. While in macroeconomic terms this is the mirror of the large current account surplus of the EU, it might also be explained by inefficient intermediation within the EU.
Second, one important objective of the SIU is to turn people from savers to investors, i.e., encourage them from looking beyond bank accounts to higher-return (but also higher-risk) asset classes. Financial literacy is important in this context, but so is effective investor protection. It is not to simply push retail investors into risky securities, but teach them to take well-informed decisions, allow them to take these decisions based on transparent and correct information, and protect them from mis-selling and post-sale misconduct.
Third, SIU relates to a lot of different products and institutions. There has often been made the comparison between banking and capital market union, with the former focused on banks and clearly defined in terms of the necessary institutional and regulatory framework. In the case of the CMU (and thus SIU, comprising both banking and capital market union), there are many different products and institutions involved; to name just a few: (i) securitisation, involving banks and special purpose vehicles packaging loans (while redeveloping this market segment seems low-hanging fruit, there is the question whether this will really be a game changer as it primarily helps deepen the lending market), (ii) venture capital, which implies both venture capitalists, but also deeper and more liquid equity markets as exit option; (iii) strengthening contractual savings institutions, including pension funds, which implies regulatory reforms, but possibly also pension reforms (see below)
Fourth and related to the above, SIU affects lots of different players. There are different regulators, on national and European level, there are financial service providers, including investment fund companies, venture capitalists and stock exchanges. There are important infrastructure elements, including clearing systems and securities depositaries. There are decisions to be taken on the political level (e.g., supervisory integration), legislative level and regulatory level. The agenda is expansive and prioritisation is critical.
Fifth, there are lots of moving parts within the SIU agenda, with policy levers on the national (e.g., financial literacy, taxation) and on the EU level (e.g., more centralised supervision). Most prominently and most difficult on the national level would be pension reform towards a capital-based pension system. Unfortunately, for those countries that rely primarily on pay-as-you-go pension system, the timing for a shift towards capital-based pension systems is demographically very challenging. More generally, there is a lot that countries can do on the national level to foster the diversification of their financial systems. To achieve the necessary scale, however, coordinated action is needed.
Sixth, policymakers have limited attention span. To get momentum, some early wins are to be aimed at and hopefully this will be reflected in the Commission’s timetable. Shifting more supervisory powers to ESMA as part of a transition to a ‘European SEC’ can provide a certain moment by creating a champion for further capital market integration in Europe. Creating an attractive (including with tax benefit) long-term retail savings/investment product can popularise the concept of the SIU across Europe.
Seventh, strong political will is needed to overcome vested interests trying to maintain the status-quo. Maintaining 27 clearing systems and stock exchanges will prevent Europe from achieving scale, critical for deep and liquid capital markets. While capital market development might seem less urgent than, e.g., than strengthening defence and fighting trade wars, only an effective SIU can guarantee long-term growth and thus welfare in the EU.
Finally, and coming back to my initial point, third time better be the charm. Europe often moves forward during times of crisis (as the construction of the banking union has shown). Given changes in geopolitical and geoeconomic fault lines, Europe has to rely more on European intermediation and capital markets. This time, we are condemned to success.
19 June 2025