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Informing policy on European capital markets
The excesses of the sub-prime crisis highlighted the dangers of the originate-to-distribute model and led to the dry-up of most securitisation markets in Europe. However, in converting illiquid pools of assets into securities that can be purchased by investors in capital markets, securitisation can play an important role in the long-term financing of industrial and infrastructure projects, as well as SMEs. The challenge is in controlling some of the risks inherent to the process such as complexity, transparency and volume-based incentives. Miguel de la Mano (European Commission), Guido Bichisao (European Investment Bank) and Ian Bell (Prime Collateralised Securities) all agreed at this ECMI-CEPS event that Europe needs to revive its capital markets to ride its way out of the crisis, including by the use of securitisation as a tool permitting institutional investors to benefit from the local underwriting expertise of banks. The prudential framework may need to be fine-tuned to better differentiate good quality securitisation from complex and opaque one.
The CEPS-ECMI Task Force on “Supporting Long-term Investing and Retirement Savings” met on 14th March, for the last time before the publication of its final report. Among the issues discussed were the impact of prudential rules (Solvency II and IORP II) on asset allocation and the single market for non-occupational retirement vehicles. In discussing these issues, the Task Force was aware that the risk to the business model of traditional life insurance comes primarily from the low interest rate environment. Yet, the Solvency II framework needs to be fine-tuned to better distinguish default risk from spread risk, in the presence of fixed liabilities backed by assets held to maturity. But promoting a higher allocation in retirement schemes to equity and less liquid asset classes is a different question altogether. Product innovation may need to be assisted by regulatory action to build a single market for long-term retail investment funds and default third-pillar pension schemes. The challenge in this respect is to overcome the myopic risk aversion exhibited by most beneficiaries when saving and investing for their retirement.
Over the next few months, the rapporteurs for this Task Force, Mirzha de Manuel (Researcher) and Karel Lannoo (Senior Research Fellow), will draft the Final Report based on the discussions held in the Task Force and the research carried-out independently and in parallel by the European Capital Markets Insitute (ECMI) and the Centre for European Policy Studies (CEPS).