TSI Congress 2021

The dawn of a new era – Financing structural change and action on climate change with Asset Based Finance

The coronavirus pandemic and its economic impact are slowly fading into the background. Now Europe is setting its sights on climate change and its challenges. In the context of the envisaged European Green Deal, the EU Commission has embarked on a regulatory path that will affect the real economy and the financial sector in their core functions and will have far-reaching implications for the economy, its future structure and, above all, its financing.

Already at the beginning of the congress, Dr Sabine Mauderer, a member of the Executive Board of the Deutsche Bundesbank, provided the framework for the discussion in her opening speech. Digitalisation and the sustainable transformation of the German economy will cost billions. Most of this money will have to be raised by the private sector, and securitisation can contribute to this, especially since a significant part of Germany's economy is bank-financed, as are many other countries in the EU. Jan Kupfer, member of the Management Board of Unicredit Bank, also pointed out at the opening panel that Germany's companies were well positioned for the post-coronavirus era. But the high demand for financing is a challenge, and the new EU sustainability regulation is already leaving its mark, because in the future not every company will be able to count on readily obtaining finance from banks.

The new taxonomy, a buzzword that found its way into all niches of the discussion, obviously makes it difficult to continue financing some companies and sectors. First of all, as Michael Schmidt, Chief Investment Officer of Lloyds Funds, noted, the taxonomy is a sensible classification of economic activities and not a regulatory requirement. It is important to support companies in their transformation, but in the future it will be more difficult for capital markets to fulfil their functions if they become fixated on the taxonomy regulation. In the Investor Kick Off, which took place in parallel, the opinion was expressed that the collecting of data to fulfil the taxonomy regulation could become more important than the traditional investor function. What does this mean for the further course of the credit cycle?

The review of EU sustainability regulation made it clear that this set of regulations is likely to significantly exceed all previous financial market regulations in volume and complexity. And since detailed data form the basis for this, data procurement and management will also become extremely important. This will be all the more so as these data are now often of a production-related nature and have therefore hardly been kept in financing business so far.

The lack of compatibility of the different steering elements used in parallel in sustainability regulation was questioned at several stages of the discussion:

• How, for example, does economic governance via CO2 pricing fit with a technology requirement under the taxonomy regulation?
• How does European regulation fit into a globally networked economy in which many suppliers and customers are subject to different rules?

Even in the diverse, interwoven and interdependent EU taxonomy regulations, internal coordination problems already seem to be emerging, and there is a high degree of confusion as to what the ultimate regulatory consequences of the collected and published data would be.

What’s next for the European securitisation market?

In essence, the coronavirus crisis has already shown that Europe in particular needs a functioning securitisation market in order to link bank-based business financing with the capital markets and to enable an efficient assumption of risks by capital market investors. In the course of the crisis it was only logical to quickly adopt the overdue equal treatment of true sale and synthetic securitisations. There were also regulatory improvements to enable the securitisation of NPLs. Both were positively received by the market. However, according to Steve Gandy, Managing Director, Head of Private Debt Mobilisation, Notes and Structuring at Santander UK, pragmatic solutions to the outstanding issues around significant risk transfer SRT are needed to enable commercial banks to use this important capital management tool effectively.

Assessments of the risk, transparency and standardisation aspects of securitisation market regulation in recent years were largely positive. There was agreement that cooperation with regulators has also developed well. It also became clear at the TSI Congress that regulatory developments pertaining to the securitisation market continue unabated. Representatives of the EU Commission noted the justified wish of the participants to pause and concentrate on simplifying existing rules – one might even say, making regulation itself sustainable. The EU Commission has already presented the first results of the ongoing consultation on the revision of securitisation regulation, but it remains open to what extent this wish can be met.

The segment of private and ABCP securitisations, which is important for financing the real economy, deserves special attention. Here, Manfred Waldrich, Head of Conduit Management at LBBW, made it clear that there should be no further burdens from regulation, but rather targeted improvements must be made in the area of transparency regulations.

The securitisation market is looking at the new sustainability regulation with very mixed feelings. On the one hand, the financial sector is facing tens of thousands of pages of new regulations that will also affect securitisations and create new uncertainties. Certainly, there will be an expansion of the already very extensive transparency regulations regarding ESG. It is questionable to what extent the successfully established STS regulations will be supplemented. On the other hand, the securitisation market, more than any other financial market segment, has learned to deal with complex requirements over the last ten years. Therefore, it will probably suffer less than other competing financial instruments. And the emergence of a segment for "sustainable securitisations" could also be an opportunity for further market development.

The ECB influences large parts of the capital markets with its monetary policy; interest rates and refinancing of banks are directly related to it. But the ECB, too, wants to pursue a sustainability policy in the future and to this end align its monetary policy with the EU sustainability regulation. Securitisations are often used as collateral in repo transactions between banks and the ECB, in addition to covered bonds. The topic therefore met with great interest as well. Phillip Kuss from the ECB presented the proposed framework: The transparency requirements of the collateral framework, which is central to monetary policy, are to be expanded on the basis of the Taxonomy Regulation and CSRD. Prof Volker Wieland, monetary policy expert and advisor to the German government, disagreed. In his opinion, it would make little sense for institutions to abandon the tasks assigned to them and for central banks to take over government tasks and extend their monetary policy function to climate change.

Contrary to all predictions, inflation has firmed up since the last congress. In August, Germany’s inflation stood at 4.1%, the highest rate in 28 years. The traditional business breakfast on the second day of the TSI Congress was dedicated to this topic. The renowned economic historian Prof Werner Plumpe showed that in economic history, inflation was primarily a monetary phenomenon, for example as a result of the financing of the First World War and the US dollar glut after 1945, and especially after the collapse of the Bretton Woods Agreement in the early 1970s.

He sees low productivity growth in Europe combined with a very expansionary central bank policy as the real problem currently driving inflation in the euro area. Plumpe sees this as particularly worrying because most European countries are so highly indebted that they would no longer be able to pay interest and principal on their debts if interest rates were to normalise. Against this background, he sees the ECB more as a political actor than as an independent central bank. Plumpe concluded by saying that from a certain point onwards, inflation leads people to fundamentally question historically grown political and social structures. It was a thought-provoking discussion.

The topic of decentralised finance was discussed under the two aspects of ‘securitise the tokens’ and ‘tokenise the securities’. The former is relevant for the tradability and custody of crypto assets and crypto currencies, which is important for investors, while the latter deals with the electronic, DLT-based mapping of the entire value chain of securities and securitisations. In addition to technological development, the legal framework and adequate supervision are particularly relevant, emphasised Oliver Fußwinkel, Head of Division SR3 (Financial Technology Innovations) of the Federal Financial Supervisory Authority.

The closing panel of the congress was entitled ‘The dawn of a new era? Fields of Action in Economic, Financial and Environmental Policy for Germany in Europe’.

The moderator Stephan-Götz Richter, Editor-in-Chief and Publisher at The Globalist and Global Ideas Center, started the discussion by asking ‘How do we make an obdurate Germany fit for the future?’ There was agreement across the party lines of Greens and Liberals: We must have a government of projects, not more policies that settle for the lowest common denominator. And we must aim be to become climate-neutral without scaring away the private sector. In order to achieve this, we need clarity as well as certainty for transitional technologies. According to Dr Dorothea Siems, chief economist of ‘Die Welt’, Germany’s climate action policy is not looking good internationally. All parties, not only the CDU/CSU, need to return to the proven principles of the market economy. She said this was a basic prerequisite for a taking successful approach to climate action policy in a possible new coalition.

According to Kerstin Andreae, Chair of the Board of BDEW, security of supply in the electricity grid is an essential prerequisite for the acceptance of climate-neutral electricity supply. Therefore, energy imports must be ensured, new gas-fired power plants are needed, the planning process for new wind power plants must be speeded up and hydrogen technology must be advanced more quickly. Dr Levin Holle from Deutsche Bahn in particular pointed out that old mistakes have to be corrected quickly, and of course everything needs financing, a fact that Dr Lukas Köhler of the FDP emphasised that this was obviously not possible under the existing conditions in the electricity market. These have to be changed quickly and made market-based and efficient, he added.

But it also became clear that once we get down to the details, there are no interlocking overarching strategies. Levin Holle referred to the European taxonomy approach as too rigid and not practical enough. There are simpler, faster-acting control instruments. The whole idea of transformation was missing in the rigid taxonomy approach, said Prof Ines Zenke, Vice-President of the SPD Economic Forum.