From the reader. Kauppalehti wrote on 29.10. on bank risk transfers and synthetic securities. Risk transfer is a subtype of securitization. Securitization, on the other hand, is not only about the capital management of banks, but also about a way to enable business financing in a situation where capital requirements are tightening significantly.
Securitization is a tool that can be used to divert wealth from capital markets to investments and spread risks at the level of the financial system. This means that the bank turns the loans it has granted or the risk associated with them into securities and sells them to investors. This enables market financing to be channeled to companies, even if they are too small for traditional bond markets. For banks, securitization is an important risk and capital management tool.
At the same time, securitization involves risks that must be carefully managed. The EU’s regulatory framework is strong: the European Central Bank supervises the operations of large banks, and the disclosure obligations and conditions related to securitization are strictly regulated. Banks must keep part of the risk of securitized loans themselves, and the criteria for granting credit must be as strict as in other lending.
The regulation ensures that with securitization the total amount of capital does not decrease at the system level. The problems of the previous financial crisis were mainly related to US securities, not European ones.
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Capital requirements are getting tighter
At the EU level, it has been decided on significant tightening of the capital requirements of large banks. In practice, this means that banks have to tie up even more capital in relation to their balance sheet. This increases the banks’ capital costs and affects the types of projects and customers the banks finance.
If capital requirements are increased too much, there is a risk that the supply of financing for companies and investments that create growth and jobs will weaken.
With the current capital regulation, the EU’s banking sector has survived the corona crisis, the Russian war of aggression and the liquidity problems of US banks with dry feet. Even so, the solvency requirements of the largest European banks have been tightened by the supervisors by up to 100 billion euros between 2021 and 2024, which limits the banks’ lending capacity by up to 1.0 to 1.5 trillion euros.
The additional strictures that have already been decided by the EU are still to come, while in the United States the regulation is probably being eased.
Securitization is an important tool for securing business financing.
Secure business financing
In the EU, securitization has been identified as a key means of enhancing the transfer of capital to investments. The Commission has proposed simplifications to the securitization regulation, which will enable the instrument to be used more widely than at present. They would also expand the group of credits whose securitization is profitable, especially in the low-risk operating environment of the Nordic countries.
Securitization is an important tool for securing business financing and channeling foreign capital to Finland. Banking regulation should be viewed more broadly from the point of view of competitiveness: all possible means must be sought in which the financial sector can respond to growing financing needs.
The key would be to eliminate overlaps in macro-stability regulation, evaluate EU-level regulation from the point of view of the competitiveness of European banks, and make full use of all the relaxations made possible by EU regulation. Finland and Europe cannot afford to leave a single stone unturned in order to ensure a favorable financing environment for companies in the future as well.
Jyrki Katainen
social relations director, Nordea