Frankfurt Europe urgently needs a renaissance of the controversial securitization market – Lutz Diederichs, head of Germany at the major French bank BNP Paribas, is convinced of this. Diederichs admits that this market fell into disrepute during the great financial crisis of 2008: “But 14 years later we have to stop demonizing this instrument,” said the banker in an interview with the Handelsblatt.
Securitization allows banks to bundle loans from their balance sheets into securities and sell them on the capital market. Before the outbreak of the financial crisis, many banks in the USA and Europe bundled real estate financing into sometimes extremely complex financing instruments.
When the US real estate market finally slipped into the crisis in 2007, the investments that were often touted as safe lost massively in value. The US investment bank Lehman Brothers went bankrupt as a result, numerous other banks around the world came to the brink of collapse and had to be rescued with taxpayers’ money.
If European banks want to have a chance to catch up with their big US competitors, Europe urgently needs a unified capital market, emphasizes Diederichs. This demand has been raised regularly for years by national and European lobby groups.
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“As there is unfortunately still a lack of political will to complete the capital markets union in the EU, the regulators must look for measures that promise quick success, and this includes reviving the securitization business,” emphasizes the banker.
Compared to the US, the European securitization market is “tiny”. Diederichs sees this as a real disadvantage for the financial institutions in the EU, because the US competition could pass on a large part of the loans they have granted to the capital market in a way that is easy on the balance sheet, while this is much more difficult for the EU banks.
>> Read here: Supervisors see some banks facing challenges in building up crisis buffers
Diederichs finds it regrettable that the completion of the EU banking and capital markets union is still perceived by the public as an issue that only affects the financial sector. “This is a deeply political and social issue,” emphasizes the banker.
This can be seen in major economic tasks such as the green and digital transformation. The gigantic financing requirements for this change cannot be covered with loans from financial institutions and state funds. As long as the capital market union is not completed, the EU will have a strategic disadvantage compared to the USA, where the capital market is four times larger than in Europe, which is still fragmented in terms of regulation.
Does the EU have rules that are too strict compared to the US?
Deutsche Bank CEO Christian Sewing, who also heads the Association of German Banks, also believes that the current EU rules for the securitization market are too restrictive. Also for this reason the market is tiny compared to the USA with only about a tenth of the volume. Adam Farkas, head of the capital market association AFME, has identified the non-functioning securitization market as a crucial weak point.
The EU last changed the securitization market in 2017 with the introduction of the new STS label. The abbreviation stands for “Simple, Transparent, Standardised”. In doing so, it also introduced new protective clauses as a reaction to the financial crisis.
Farkas concedes that the new label works in principle, but many securitization transactions are no longer profitable as a result. The volume of the European market continues to decrease while the US market is growing.
According to an AFME report, securitization transactions in the EU have now fallen to their lowest level on record. The proportion of outstanding EU loans that were transferred via securitisations and loan portfolio sales is now at 1.6 percent, only half of the value from 2018.
For the time being, the EU Commission has rejected calls from the financial sector for further major reforms. In their estimation, the market is doing well overall. However, the EU also concedes in an interim report that not all expectations in terms of volume and number of participants have been fulfilled.
BNP has ambitious goals in Germany
BNP is one of the largest foreign banks in Germany. Despite the fear of recession, the energy crisis and inflation, the French financial institution intends to increase its income from business in Germany to EUR 2.8 billion in the coming years. That would correspond to average annual growth of around six percent, Diederichs calculates.
This would mean that the pace of growth would slow down compared to previous years. According to earlier information, BNP Paribas in Germany grew by an average of 8.2 percent annually from 2016 to 2021. According to the calculations of the French money house, no other major bank active in Germany has developed so strongly.
The bank wants to get into business with German low earners.
(Photo: Reuters)
For 2021, BNP Paribas reported revenues of 2.2 billion euros in its German business. The German subsidiary of the largest money house in the euro zone does not provide any information on profitability. Insiders assume that the return on equity is well over ten percent.
>> Read here: BNP wants to outperform the Dutch ING in its German business
With its new strategy, Diederichs wants to move up from eighth place in German business to fifth place by 2025. Then only Deutsche Bank, Commerzbank, DZ-Bank and Hypo-Vereinsbank would be ahead of the French.
A new customer group should also contribute to achieving the growth targets. In the coming year, BNP Paribas wants to enter the business with German low-income earners, who often do not have a traditional bank account. As an example, Diederichs cites seasonal workers who often receive their wages in cash.
BNP Paribas wants to make it possible for these people to deposit, withdraw and transfer cash. The offer will run through the BNP Paribas subsidiary Nickel. In Portugal, France and Belgium, the bank has already won 2.8 million customers with this strategy.
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