Think-tank casts doubt on EU plans for reviving securitized debt market

November 16, 2016 11:05 AM EST

Jean-Claude Trichet, former European Central Bank (ECB) president arrives for the inauguration of the ECB's new headquarters in Frankfurt March 18, 2015. REUTERS/Wolfgang Rattay


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By Huw Jones

LONDON (Reuters) - The European Union's emphasis on reviving securitized debt markets to help fund small businesses is wrong and should be revised to focus on stock markets, a global think-tank of former regulators and central bankers said on Wednesday.

The Group of Thirty (G30), chaired by former European Central Bank President Jean-Claude Trichet, said that "contrary to conventional wisdom", credit for small and medium sized companies (SMEs) was typically provided by banks, even in the United States.

The EU has launched a Capital Markets Union (CMU) project to help wean the continent's economy off its heavy reliance on bank loans. Reviving securitization, whereby loans can be packaged into a security which is then sold to unlock more funds, is a central plank of the CMU.

But some beliefs in securitization are wrong and a more realistic assessment of assertions about the sector is needed, said former International Monetary Fund (IMF) managing director and a vice chair of the G30 report, Jacques de Larosiere.

The best opportunities for improving financing of small companies are from private debt placements and stock markets, "rather than ... the probably impossible task of unleashing SME securitization markets," de Larosiere added.

An EU draft law to revive securitization is bogged down amid calls for more transparency in a sector where, in the United States, defaulting securitized debt based on poor quality home loans contributed to the 2007-09 financial crisis.

"Most SME debt finance must still be based on bank finance. But credit, may, in some regions, be hampered by low profitability of the banking sector inherent to the low interest rate environment," de Larosiere said.

CHINA SHADOW BANKS

The G30 report looked at shadow banking and capital markets, referring to growth of historically less regulated institutions outside traditional banking that offer credit.

There were "elevated" financial stability risks from shadow banking in some countries, particularly China, where "unregulated or imperfectly regulated" shadow banks provide 30 percent of credit, the report said.

It said risks to financial stability from the combination of rising leverage in the global economy and shadow banking "may be as great as before the 2007-08 financial crisis".

Global regulators at the Financial Stability Board have already drawn attention to the growth of shadow banking in China, and have, along with the EU and United States, begun introducing rules to regulate aspects of the industry.

"Shadow banking regulation is never going to be something that we have done it, that's it. It's a continually mutating process. New institutions with new names emerge," said Adair Turner, former chairman of Britain's Financial Services Authority, and chair of the G30 report.

Loose monetary policy pursued by many central banks to boost growth may be fuelling shadow banking, the report said.

(Reporting by Huw Jones; Editing by Mark Potter)



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