Topic of the research report

Bank management instruments for financing the transformation

“Active credit risk, capital and liquidity management: An analysis of asset-based instruments” (in German)

The transformation of the economy towards sustainability and digitalisation requires triple-digit billions of euros in investments by German businesses every year. In countries with financial systems like Germany, this poses a particular challenge for banks as the key financing partners of companies. Banks cannot take the complete risk or would need an unrealistically large amount of additional equity in addition to considerable liquidity to finance these investments. They should therefore be put in a position to finance the transformation with the help of asset-based instruments.  

Prof Andreas Pfingsten and colleagues from the Finance Center at the Westfälische Wilhelms-Universität Münster, with financial support from the Capital Markets Union Foundation Project, have presented the report Aktive Kreditrisiko-, Eigenkapital- und Liquiditätssteuerung: Eine Analyse assetbasierter Instrumente.  

The study examines what contribution securitisations and other asset-based instruments can make to active liquidity, credit risk and capital management in banking. The analysis shows that the use of securitisations to support the financing of investments in transformation would be reasonable. The existing regulatory framework for limiting risks to financial market stability should therefore be further developed in a proper way allowing for proportionality. 

Key questions 

In their comparative analysis of asset-based instruments between Europe and the USA over the last twenty years or so, the authors focus on the following key questions:  

  • What are the characteristics of traditional (true sale) securitisations, synthetic balance sheet securitisations and covered bonds?  
  • What are the differences between these instruments in terms of credit risk, equity and liquidity management? 
  • What are the differences between the European and US markets in terms of characteristics and development of these instruments? 


Key conclusions regarding the regulation of the EU securitisation market 

With regard to the comparison between Europe and the US, the authors conclude that the negative experience in the US market (Great Financial Crisis of 2007-08) should not be transferred one-to-one to the regulation of asset-based instruments in the European market due to different business models. Although EU securitisations were not part of the problem during the Great Financial Crisis, their extraordinarily conservative regulation relative to other financial instruments in the aftermath of the Great Financial Crisis curtails securitisations in Europe.  


Further results in detail  

With regard to the contribution of asset-based instruments to active credit risk, equity and liquidity management, the authors record the following findings:  

  • Credit risk management:  
    • A bank can reduce credit risk by securitising its receivables.
    • Covered bonds are generally not suitable for banks’ credit risk management because there is no risk transfer. 
  • Capital management:  
    • Covered bonds are also not suitable for banks’ capital management. 
    • Regulatory arbitrage as it was before the financial crisis is practically impossible today and therefore no reason for scepticism about securitisations. 
    • By means of securitisations – if appropriately designed with a significant risk transfer – capital relief in banking can be achieved, as is also shown in most of the few empirical studies. 
    • In the case of retention of issued securities by the securitising bank itself, for example for repo transactions with the ECB, there is no capital relief. 
  • Liquidity management:
    • Covered bonds and traditional securitisations are suitable for generating liquidity, reducing maturity mismatches and diversifying funding sources, synthetic securitisations are not.  
    • Empirical studies largely confirm these theoretical results.