Cross-border risk sharing is essential for European financial recovery, says EconPol report

Cross-border risk sharing through securitisation markets is a crucial element of financial integration in Europe, according to a new policy brief from EconPol Europe. And while the new EU framework for simple transparent and standardised securitisation, due to be implemented in January 2019, is an important step it does not go far enough, say authors Karolin Kirschenmann, Jesper Riedler (ZEW Mannheim) and Tobias Schuler (ifo Institute).

While the EU measures will help to increase cross-border risk sharing and to integrate European financial markets, the new framework needs to be accompanied by competitive capital and liquidity regulations for securitised products and increased harmonisation, including a European-wide credit registry.  

The authors identify three barriers to effective securitisation markets in the EU: the stigma that has been attached to securitisation since the global financial crisis; the tightening of regulations covering securitisation and the complexity of the current framework; and depressed demand for credit in several European countries.

What is needed, says the brief, is a two-pronged approach: further improvements to the regulatory framework to reduce barriers to a thriving securitisation market, coupled with explicit incentives for risk-sharing.

“The case for cross-border risk sharing is especially compelling for members of the euro area,” the authors say. “Thorough financial integration helps to synchronise the effects of a single monetary policy across euro area countries, which is conducive to financial stability in general and price stability in particular.

“Sharing risk is a vital part of a functioning monetary and economic union such as the Eurozone,” they  conclude. “The lack of cross-border risk-sharing in the banking sector, which constitutes the dominant source of funding for European firms and households, is a significant barrier to better integrated financial markets in Europe.”

Read the full report: EconPol Policy Brief 10