The European Central Bank’s Governing Council recently argued that Capital Markets Union (CMU)
is imperative for Eurosystem countries, stating that:
“making full use of Europe’s capital markets is key to mobilise the massive private
investments that are needed to carry out the green and digital transitions, and to enhance
the EU’s productivity and competitiveness in a shifting geopolitical landscape” (ECB
(2024a) published 7th March).
From a macroeconomic perspective, there is little mystery why private sector investment in Europe
has fallen short of what central bankers and others believe is necessary to generate economic growth.
The recovery in demand since the pandemic has been sluggish3
and the profitability of European firms
has been too weak to generate a spontaneous increase in real investment by the private sector.
Moreover, many believe that structural impediments to investment exist in Europe’s financial
markets. European debt markets function primarily through the region’s banks, and the profitability of
these banks lags behind that of international competitors.
With low economic growth and pressure on bank profitability, banks are far from queuing up to
expand their balance sheets by boosting lending. Since new bank equity (beyond what is required by
prudential regulation5
) is largely unavailable, how can banks rise to the challenge of financing
additional investment? Greater room to lend can only be achieved if banks are able to shift risks off
balance sheet to other non-bank investors. Securitisation provides the framework for achieving this.
In this respect, Covered Bonds (CBs), which, as secured bank funding instruments, are often
compared to traditional (true sale) securitisations, are no substitute for securitisation. The credit risk
of the loan pool covered by a CB remains on the issuing bank’s balance sheet and CBs generate