Comments on the session “From a Banking to a Financial Union” · 2016-10-11 · study and evaluation of each security and of each issuer and guarantor of, and each provider of

Comments on the session

“From a Banking to a Financial Union”

Banco de Portugal, Lisbon, 5 September 2014 Lúcio Vinhas de Souza, Sovereign Chief Economist

Banco de Portugal, Lisbon, 5 September 2014

» EU/EA much more reliant on bank financing than other

markets, notably the US

» By necessity, banks have reduced leverage and lending

levels, while leading corporates to increasingly seek

capital markets funding as needed

» However, corporate dependence on banks for funding

remains high: debt securities comprised just over €1.1

trillion or 80% of long-term financing for EA corporates as

of 4Q 2013 (compared to 84% at the beginning of 2005)

Financing corporates in the EU


European Economies Far More Reliant on Bank Lending than US

Source: Haver


Financing of Euro Area Non-Financial Corporations (€ bn)

Source: ECB


» Growth in securitization markets – including SME ABS

and collateralized loan obligations - improve banks‘

capacity to originate lending to corporates by helping them

reduce the accumulation of risk on their balance sheet

» However, European issuance a) remains muted and b)

continues to be for the most part retained by banks rather

than placed with third party investors

» One of the reasons for this is that regulatory rules for

issuers and investors continue to hinder growth for

European securitizations

Securitisation constrained


European Structured Finance Issuance – SME Securitizations Levels Still Very Low (€ bn)

Source: Moody’s Investors Service


» A variety of initiatives in the US and EU intend to support

SME lending and transform SME-backed securities into a

viable securitization market

» For example, the ECB has just announced an ABS

purchase program (‗simple and transparent‘ ABS, where

underlying assets consist of claims against the euro area

non-financial private sector, more details still to follow

later)

Securitisation growing, from a low basis


» EU securitizations performed well in the crisis, with low default

rates, also support market‘s expansion (less than 0.5% of all

EMEA ABS and RMBS notes rated by Moody‘s had a principal

loss). However, uncertainty on details of the regulatory

framework for securitization makes investors cautions

» Capital requirements for structured finance investments are

high relative to those in other debt instruments of similar risk,

such as covered bonds, leading to a market sentiment that they

are a barrier to the market‘s expansion

» Also, less traded that what one could expect: for example,

much recent ABS issuance has been retained by issuers, partly

for use as collateral in ECB‘s refinancing operations

» Basel III and the AQR also act as constraints to leverage

Some percieved constraints to the market’s expansion


Outstanding securitisations and bank loans to NFCs (Q2 2014, € bn)

Source: SIFMA and ECB


Securitization Issued During 2013 (€ bn)

Source: SIFMA


» Net new bank lending has been lackluster, or even

negative, in most quarters since the financial crisis

» While the substitution effect of bank loans for other

sources of funding has provided a stimulus for the bond

markets, the equity markets have also been a source of

funding, as evidenced by the growing number of IPO

activity in recent quarters

Low lending growth, also limited expansion of other funding sources


Financing of Euro Area Non-Financial Corporations: Four-quarter Moving Sums of Transactions (€ bn)

Source: ECB


» The bulk of corporate debt issuance still emanates from

larger countries such as Germany, France and the UK.

However, the growth in number of new issuers has been

more evident in stressed EA countries like Spain and Italy

» As a matter of fact, high yield-issuance in 2013 in the five

euro area periphery countries (i.e. Italy, Spain, Portugal,

Greece and Ireland) doubled to $24 billion, growing to

27% of total EU issuance (parallel to a decreasing

average rating and credit quality of new issuers)

However, EA periphery share of issuance growing......


Gross Corporate Debt Issuance (€ bn)

Source: ECB


High-yield Issuance from EA Periphery by Corporate Family Rating (CFR)



» (very) Low interest rates have enabled some corporates to

further leverage themselves through high yield bond

issuance

» The leverage (measured as Moody‘s Adjusted

Debt/EBITDA) of EMEA speculative-grade companies

newly-rated in 2013 was on average the highest since

2010, rising to 5.3x in 2013 from 4.8x in 2011

» The significant decline in market yields at which high yield

companies are pricing new issuance, as well as the

deteriorating credit quality metrics, suggest a) that bond

markets are currently relatively accommodating and b)

that economic trends remain difficult

Accommodating market conditions...


Median Debt/EBITDA of First Time Rated EMEA Companies at Rating Assignment



» New and smaller entrants to the bond markets likely

affected by constrained bank lending, while finding the

bond markets to be accessible and potentially less

expensive at this point in time

» Yield-to-maturity at issuance for Ba-rated issuers in

Europe has fallen from about 7.5% in 2010 to 5.0% in

2Q14, a fall not supported by stronger credit quality

» In comparison, the 5+ year average new corporate loan

rate (at all credit grade levels) by European financial

institutions has fallen over the last three years and now is

between 3% and 4%

... even to spec grade issuers


EMEA High Yield YTM At Issuance*

*Issuance rating by Moody’s



» ―Shadow banking‖ can be broadly described as any credit

intermediation activity involving entities and/or activities

outside the normally regulated regular banking system

» A implication of this definition, given the globally different

regulatory footprints (or, in other terms, different

jurisdictions regulate different institutions and activities as

part –or not- of the formal bank systems), is that what is

classified as ―shadow banking‖ differs between countries

A coda on “shadow banks”


» Well, let‘s look at the data

» Shadow banks in the EA, on average, are less than a third

of relative size to ―traditional‖ banks as in the US

» And, without NL, that would be less than a sixth

» Does the larger relative size of the shadow bank system in

the US represents a problem? Does the smaller one in the

EA? Chapéus há muitos!

Do they represent a danger to the EA/EU?


Into the Light: Non-bank Financial Intermediaries as a % of GDP (2012)

Source: FSB, 2013

0

20

40

60

80

100

120

140

160

180

200

0

100

200

300

400

500

600

700

800

900

UK NL FR DE ES IT EU (avg) EA (avg) US CH TR RU

Shadow banks Banks Shadow banks/banks (%, right scale)


Thanks for your attention!


Lúcio Vinhas de Souza

Managing Director-Sovereign Chief Economist

1.212.553.1117 tel

1.212.298.6458 fax

[email protected]

mailto:[email protected]


Some Related Moody’s Research

» Euro Area Contraction in Corporate Lending Is Credit

Negative, April 2014 (167342)

» Italian Corporate Bond Market: Improving Macroeconomic

Conditions, Low Interest Rates and Ongoing Bank

Disintermediation Will Fuel Issuance for Next 12-18

Months, June 2014 (172123)

» The Revival of the European Securitization Market,

Overcoming the Barriers, June 2014 (SF370538)

» European ABS and RMBS: Historical Resilience Will

Continue Beyond 2014, June 2014 (SF367681)

» Newly-Rated EMEA High-Yield Companies: Credit Quality

Likely to Weaken in 2014, April 2014 (168791)

https://www.moodys.com/research/Euro-Area-Contraction-in-Corporate-Lending-Is-Credit-Negative--PBC_167342

























http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_172123




















































http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF370538



























https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_SF367681





























https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_168791



































Banco de Portugal, Lisbon, 5 September 2014 26

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Comments on the session “From a Banking to a Financial Union” · 2016-10-11 · study and evaluation of each security and of each issuer and guarantor of, and each provider of