Funding the EU economy - The role of banks and financial markets - inforgraphics. Also available in: FrenchGermanItalianSpanish

The market at a crossroads. What is securitisation? Securitisation is the pooling together of cash-generating assets, such as mortgages, auto loans or SME loans,created by banks and initially funded on their balance sheets, and funding these assets instead by issuing bonds inthe capital markets. These bonds are bought by a range of investors – typically banks’ treasury departments, insurance companies anda range of investment funds. The investors receive regular payments reflecting the interest and principal paymentsmade by the underlying borrowers. Often, the bonds are divided into different tranches with different characteristicsand varying levels of risk. The higher-risk tranches yield a higher return for investors.

Abstract: The EBA has analysed the liquidity of different asset classes as part of its work for the European Commission on definitions to be employed in a European implementation of the Liquidity Coverage Ratio. This paper critically examines the EBA’s analysis, focussing on the exclusion of bid-ask spread data from the evidence employed. Using bid-ask spreads, we show that Asset-Backed Securities (ABS) and Covered Bonds (CB) do not exhibit radically different levels of liquidity in recent years. Furthermore, we show that, based on bid-ask spreads, some non-residential-mortgage-backed ABS (excluded from the LCR in the EBA proposals) have been more liquid than CBs.

1. Executive Summary – The Specific Rationale for Change Given the current state of the European economy, the impact of the Euro zone crisis, pro-cyclical changes to banking regulation, the inability of many European banks to directly access the capital markets, collateral encumbrance constraints, and investor capacity constraints on bank debt, it is important that European policymakers recognise and take proactive steps, together with the industry, to help encourage investment in high quality securitisations. According to recent estimates, Eurozone banks have shrunk by € 3.3 trillion since May 2012 and it is estimated that they will cut around € 2.8 trillion more assets over the next 3-5 years. Corporate loans and are not expected to surpass their pre-crisis peak of € 4.8 trillion until 2015. The purpose of this report is to: a) summarise as well as provide details on the specific economic benefits of high quality securitisation to the overall European economy, b) provide information which is beneficial to investors, c) provide relevant highlights on changes to banks and regulations, d) provide data on the state of the European securitisation market, including its strong credit and secondary price performance, and e) provide highlights of recent industry initiatives to identify industry best practices in securitisation, such as the Prime Collateralised Securities (“PCS”) initiative. The specific rationale for increased investment in high quality European securitisations is highlighted below. Points 1-8 focus on funding issues, while the remainder focus on investor issues, financial stability, regulatory measures to date and industry initiatives. Supporting data is provided in the text which follows this Executive Summary.

AFME's 2013 Annual Review looks back on a year where the banking sector continued to deal with the breadth of regulatory and structural reform, as well as one in which policymakers have shifted their own agenda from financial reform towards creating an environment that will help to kick-start Europe’s economic growth.

An industry survey of obstacles in the European funding markets and potential solutions. This report was commissioned by the AFME and published in June 2013. The report's findings were designed to offer constructiverecommendations to the debate prompted by the European Commission’s GreenPaper on the long term financing of the real economy. The report focuses on barriers to funding and what could be done to improveavailability of funding for growth. While overall macroeconomic uncertainty ishighlighted as a key constraint, the report did not seek to address this issue, as it wasa complex policy field already being considered by many stakeholders. The report was driven by a working group comprising AFME staff andmembers, and written by Oliver Wyman and the working group. The document is separate from AFME’s response to the Commission’s Green Paper consultation onLong Term Financing of the European Economy, dated March 2013. The findings contained within the report are interview-based and industry led. Thereport captures and seeks to articulate the collective views from users and providersof funding, including large corporates, mid-sized corporates, SMEs, various types ofinvestors, and banks. To provide the evidence base for this report, Oliver Wyman has conducted interviewswith 75 firms across eight European countries, involving over 100 of their employeesand almost 120 interview hours. Interviews have been supplemented with specificinput from some survey respondents as well as research and technical detailprovided by Oliver Wyman, AFME and its members so as to provide further context. Annual revenues for corporates interviewed total approximately €400 billion,ranging from €1.2 million to €110 billion. European assets under management of investors interviewed total more than €1.7 trillion. AFME member firms underwrite, distribute and trade the vast majority of the €1.1 trillion of new debt, equities and syndicated loans distributed in Europe in 2012, so are well placed to understand the funding needs of corporates and investors.

Over the last few months, AFME has undertaken a detailed analysisof fixed income trading activity to help inform policy makers in thecontext of the MiFID legislative process. This AFME Reportoutlines the key findings and supporting data, including anExecutive Summary. The major findings of the Report are that individual fixed incomeinstruments have material differences in trading activity and thatthe market maker model is essential for the functioning of thesecondary markets across fixed income sectors – a major providerof capital to governments, companies and consumers for economicgrowth. This means that any transparency requirements will needto be carefully calibrated and dynamic to take into accountsecondary market liquidity, issuance size and trade size.

AFME’s 2012 Annual Review explains the association’s role in restoring trust and ensuring Europe remains a fair and open place to conduct capital markets business.

Panacea or Problem? In light of the ongoing review of the Markets in Financial Instruments Directive (MiFID II), this latest research from TABB Group investigates the potential impact of the review’s pre-trade transparency proposals on the fixed-income market, its participants and the real economy. TABB Group’s research on fixed-income markets illustrates an industry struggling under the weight of the current economic climate, a decline in risk appetite and concerns over impending regulation. This sentiment comes not only from banks and dealers, but also from institutional investors frustrated at their inability to find liquidity, companies frozen out of the debt markets, and sovereign issuers that are progressively becoming reliant on domestic investors as international financiers retreat. TABB Group, which was founded in 2003, is a global financial market research firm that conducts research based upon an interview-driven methodology. Our research for this report is gathered from comprehensive interviews with market participants covering a wide spectrum of investors (both institutional and retail), trading venues, market makers, as well as company and government issuers. In addition to the interviews conducted for this report, TABB has also drawn on other surveys conducted during the past six months regarding similar regulatory issues for the fixed-income market, which include a further 100-plus interviews. The majority of market participants interviewed expressed their concerns about the proposed regulation further hampering liquidity, increasing trading costs, and ultimately making it more difficult for issuers to raise capital and for investors to achieve the necessary yields over time. For this report, TABB Group examines the current structure of the debt markets and the increasingly important role they play in the wider economy. The study explains why debt markets are distinct and cannot be viewed in the same light as equity markets, and why they require different investment, distribution and trading structures. We then investigate the various types of debt trading structures, the notion that fixed-income markets are primarily institutional, the role of primary versus secondary market activity, and how the secondary market operates in relation to indicative pricing, firm quotes and actionable orders. The final section of the study looks at the regulatory changes proposed in MiFID II and the effects they will have on pricing, disclosure, order execution and the ability to raise capital.

Summary The majority of sovereigns do not post collateral to support their use of over-the-counter (“OTC”) derivatives1. As a result, dealers regularly have credit exposure arising out of these contracts which is often hedged with the sovereign Credit Default Swaps (“CDS”), and interest rate and foreign exchange swaps and options. This process has been of particular concern in Europe because of the possible ban on the use of sovereign CDS. To assist in highlighting this and other concerns arising out of the practice not to collateralize OTC derivatives, two associations2 (“the Surveying Associations” or ”SAs”) conducted a survey of dealers earlier this year, regarding their OTC derivatives exposure to European Sovereigns (“ES”).