Event on the opportunities of securitisation for transformation financing of the economy in NRW

The financing of the sustainable and climate-neutral transformation of the economy in North Rhine-Westphalia could be supported and leveraged by loan securitisation. Securitisation is an important topic for Fin.Connect.NRW because it can bring together the financing of companies in the real economy with the capital market and open up new opportunities for transformation financing. The workshop held as part of Fin.Connect.NRW on 19 October 2022 at the Deutsche Bundesbank’s North Rhine-Westphalia headquarters in Düsseldorf served to highlight and discuss the opportunities, but also the remaining obstacles, of securitisation for transformation financing.

On a global level and also in NRW, there is savings capital looking for investment opportunities. For many smaller and medium-sized companies, however, the bond market is unattractive because they either do not have the name recognition of listed companies or the required minimum issue volumes are too high compared to their company size. In addition, reporting obligations and transparency requirements are associated with too high administrative costs for small and medium-sized enterprises, so that financing via house bank loans is more feasible. Through loan securitisation, however, banks can securitise these loans as a portfolio and sell them to investors (e.g. institutional investors), manage their balance sheet and thus free up equity for new lending as well as take some of the pressure off SME financing with the global capital market.

However, securitisation has lost its reputation due to the global financial crisis of 2007 – 2009, as especially in the securitisation of US loans risks were not transparent and ratings were assigned too optimistically. Even though the European securitisation market was characterised by lower default rates, in contrast to the US market it did not take off after the financial crisis. How the European and German securitisation market could regain importance and how it can be used to finance the climate-neutral transformation was the topic of the workshop.

The President of the Head Office in North Rhine-Westphalia of the Deutsche Bundesbank, Mr Jochen Metzger, welcomed the speakers and guests as host, pointing out that too little had been invested in Germany and NRW over the last twenty years. As a result, economic potential could no longer be exploited. According to Metzger, transformation therefore requires first and foremost investment, for which time is now pressing. Russia’s war of aggression against Ukraine has shown how important it is to decouple from Russian energy imports and to diversify. But this also creates more pressure for structural change. What is needed now is financing for a decarbonised and resilient energy supply, Metzger said. Securitisation would therefore play an important role in financing, even if it had suffered in the course of the global financial market crisis in 2007-2009. Nevertheless, it is important as a financing instrument. The opportunities and risks of securitisation must therefore be discussed anew.

In his welcome address, Dr. Jakoby (NRW Ministry of Economics) emphasised the relevance of Fin.Connect.NRW as a platform for bringing together the various players from the financial sector and the real economy. This is important in order to ensure that the necessary investments in digitalisation and climate neutrality are financed in a tailored manner. In this context, he emphasised in particular that the new state government would strengthen Fin.Connect.NRW and, moreover, the role of NRW.BANK in transformation financing. Dr Jakoby explained the relevance of a financing platform by pointing out that the savings rate in NRW is very high, while the investment rate is below the national average. This makes NRW an exporter of capital in economic terms. Fin.Connect.NRW is therefore an important pillar for making greater use of this capital in NRW, said Jakoby. Securitisation also plays an important role here because it links the capital market with lending.

Sebastian Schütz from the Bundesbank gave the first presentation. In his opinion, the mindset plays a major role in the transformation. Venture capital is essential for financing the development of new technologies and US pension funds see this as a normal asset class. In Germany, however, the mindset is more focused on security and less on opportunities, which means that this asset class is seen as very risky, says Schütz. This could hinder the transformation in Germany. Because in structural change, decisions also have to be made under uncertainty. Similar to venture capital, however, the securitisation mindset is too risk-averse and the opportunities are not seen enough. This is because the vast majority of companies are financed by bank loans and the credit growth of the last few years has been too low for a continuation of this growth rate to be able to finance the necessary investments of the transformation. Thus, given the magnitude of the investment needs, the banks‘ equity might no longer be sufficient to finance the digital and climate-neutral transformation, from which a significant role of securitisation in transformation financing is derived. One potential problem, says Schütz, is that while the big banks use securitisation to manage their balance sheets, the smaller banks that finance SMEs in particular do not. Knowledge and economies of scale can explain this difference, which the expert group German Securitisation Platform wants to solve. After all, it is essential for the success of a transformation that banks bring loans to the capital market.

The expert presentation by Professor Pfingsten from the University of Münster focused on the transparency of securitisations. He pointed out that there are significant differences in securitisation between Europe and the USA and between the periods before and after the global financial market crisis. Before the financial market crisis, the securitisation market in the US was characterised by regulatory arbitrage, overly optimistic ratings for securitisations, lack of transparency and auditing, and non-transparent multiple securitisations, Pfingsten said. Even though this mainly affected the US securitisation market, securitisations in Europe had also declined, he said. Losses of European banks from US exposures also contributed to this. The fact that the European market has not recovered from the crisis is surprising, since the US originate-to-distribute model of securitisation is not used in Germany, hardly any multiple securitisations are issued here, no regulatory arbitrage is used and there is also a regulatory deductible for the issuer. In addition, a European Datawarehouse existed as a central database for securitisations. Professor Pfingsten also pointed out that the quality of securitisation ratings in Europe was significantly better than in the USA. As further factors for the low growth of the securitisation market, he mentioned the low demand for credit in some European member states in the aftermath of the euro debt crisis and the fact that government guarantees were used more in the USA. Other obstacles, he said, are more restrictive regulation and the different legal and tax systems in the individual member states, which make pooling loans more difficult. As reform options for reviving the securitisation market on the supply side, Professor Pfingsten mentioned improving the economics of securitisation by adjusting regulation and reducing complexity and volume requirements through multi-seller transactions. As reform options for the demand side, he named the reduction of investment restrictions and capital requirements for institutional investors as well as a strengthening of confidence in securitisations through transparency, retention and monitoring as well as a stronger emphasis on the differences to securitisations from the times before the Global Financial Market Crisis. He also sees a further advantage of transparency in the strengthening of discipline by the market. In addition, transparency prevents worse loans from being added to the securitisations over time. This has been possible so far because the maturity of the securitisation is significantly longer than the average maturity of the underlying loans.

Dr Holger Sachse (BCG) presented the possibilities of securitisation for financing the green transformation. He too sees it very positively that transparency would help to get the market for securitisation going. Moreover, he too sees a high demand for transformational financing. In addition to freeing up banks‘ equity for new lending, securitisation would also contribute to a better distribution of risk and enable institutional investors seeking capital investments to participate more in financing the transformation. In Dr. Sachse’s view, loans to finance solar roofs and electric vehicles, which are characterised by high granularity, are particularly suitable for green securitisation. Unfortunately, according to Holger Sachse, green securitisations still lead a niche existence in Germany. Moreover, the market is very volatile. In his view, a major obstacle is that there is no uniform nomenclature for sustainability. In his view, the following factors are essential for the revival of the market for green securitisation: a clarification of the term „green“, especially to avoid greenwashing, a critical mass of green assets for securitisation and a market premium for green investments. This could then set in motion a „Green Virtuous Circle“, in which the securitisation of green loans frees up banks‘ equity for new green lending. However, he sees securitisations with a coexistence of green and brown loans as more likely for the transitional period, but also freeing up equity for new lending for green investments. Dr Sachse concluded his presentation by emphasising the need for banks and securitisation markets to finance the green transition.

Mr. Rosario Scolaro from DZ Bank (central institution of the cooperative banking sector) gave the final technical presentation on the use of securitisation within the cooperative financial group and focused particularly on the practical experience with securitisation. Securitisation supported the financing of the real economy via asset-backed commercial paper as well as the pre-financing of leasing receivables. The trend is increasingly towards leasing company bicycles, for example. Mr Scolaro added, however, that the regulatory requirements are far too high for the smaller banks, so they often do not securitise. In addition to a sufficient volume of loans to be securitised, smaller institutions often lack the expertise for such legally complex transactions as well as the technical means to implement them, he said. Multiseller transactions via a securitisation platform are a possible solution here. However, this type of transaction is still rather uncommon in Germany.

During the discussion, these topics were discussed in more detail. Mr. Schütz pleaded for the dismantling of technical barriers and supervisory practice for smaller banks for which securitisation transactions were too complex. In addition, it should be easier for smaller banks to carry out so-called multi-seller transactions. Dr Sachse pointed out the complexity and high transaction costs of securitisation. Accordingly, measures to reduce transaction costs were to be welcomed. Dr Jakoby emphasised the relevance of securitisation for the transformation in NRW against the background of the high investment demand, e.g. in charging columns and solar roofs. A participant from the savings bank sector pointed out that the regulatory system may not take into account that many companies still need to be accompanied on the path to sustainability, but are not sustainable at this point. Mr. Schütz replied that many loans were transformation loans for this reason, but they might not meet the taxonomy, but would still contribute to sustainability by transforming the companies. However, he was confident that investors could be found for these transformation loans, provided returns could be generated. osario Scolaro from DZ Bank also spoke in favour of more multi-seller transactions. These could help the small banks with securitisation and the development banks could provide additional support through guarantees. Professor Pfingsten again warned that the US originate-to-distribute model was problematic for the reputation of securitisation and therefore not suitable for European transactions. A representative of the savings banks argued that the PROMISE and PROVIDE securitisation platforms, through which banks could securitise SME loans, could also be used for future securitisations. However, Professor replied that the regulatory environment had changed since then.

Professor Voigtländer of the German Economic Institute rounded off the event with his closing speech. He, too, saw a high relevance of securitisation, which was on a good path overall, in financing the transformation. Fin.Connect.NRW could create a platform to bring together the individual players in the securitisation industry in order to strengthen the financing of the real economy.