Keynote speech at the 10th anniversary of European
DataWarehouse
14.11.2022 | Frankfurt am Main | Joachim Nagel
1 Introduction
2 Benefits of securitisation for the economy
3 European DataWarehouse and the role of the ECB
4 Benefits of European DataWarehouse for market participants
5 The role of European DataWarehouse in research
6 European DataWarehouse and climate policy
7 Closing remarks
1 Introduction
Ladies and gentlemen,
Dr. Thun, Prof. González-Paramo,
It is a great pleasure for me to be here today and speak at this wonderful event
celebrating the 10th anniversary of European DataWarehouse.
The joint success achieved over these ten years is clear: the European markets for asset-
backed securities regained trust and confidence of investors. Kenneth Arrow, the
outstanding American economist and Nobel laureate, once wrote: "Virtually every
commercial transaction has [...] an element of trust." [1]
More than a decade ago, we were faced with the very real possibility of observing what
happens when economic trust is lost: the Global Financial Crisis. For my part, I was
more than just an observer at that time. As the financial crisis broke out, I was Director
General Markets at the Deutsche Bundesbank. I also headed the Bundesbank's financial
crisis management team until 2016. In these positions, I had the opportunity to follow
the dynamics of the crisis in close detail. As you know, the markets for asset-backed
securities were at the core of the financial crisis.
2 Benefits of securitisation for the economy
Before the financial crisis, the markets for asset-backed securities had seen high rates of
growth. For example, the total outstanding securitisation volume in Europe amounted
to USD 139 billion in 1999 and had reached USD 3.1 trillion by 2009. However, many
market participants were misled by this self-reinforcing dynamic.
The crisis revealed that considerable so-called agency problems were created at almost
every stage of the securitisation process. [2] Agency problems typically arise when two
parties - an agent and a principal - have different interests and the information is
distributed asymmetrically among them.
In the case of securities markets, the agent is typically referred to as the "originator"
and the principal is known as the "investor". The originator, usually a bank, typically has
more hard information about borrower risk of a securitised loan than the investor does.
However, in this case, the bank has an incentive not to be overly transparent about
borrower risk. [3] For his part, the investor cannot ensure that the originator is acting in
their best interests.
After the financial crisis, securitisation was blamed for passing bad loans on to
unsuspecting investors. The financial crisis has highlighted potential weaknesses in the
securitisation process, which are particularly relevant for very complex securitisations.
These include insufficient transparency and insufficient risk management systems and
valuation procedures. As a result, securitisation markets have been stigmatised in public
perception.
However, with appropriate structure and regulation, securitisation may have a positive
long-term social value. Securitisation markets complement other long-term wholesale
funding sources for the real economy. This allows enterprises to diversify their sources
of funding. By gaining indirect access to investors on the capital market, small and
medium-sized enterprises can particularly benefit from this. Securitisation can also open
up space on banks' balance sheets, thus creating leeway for further lending to the
private sector.
A market for prudently designed asset-backed securities may potentially improve the
efficiency of resource allocation in the economy and ensure better risk sharing. [4] This
occurs due to the transformation of relatively illiquid assets into more liquid securities,
often sub-divided into several tranches with varying levels of risk. As a result, the costs
of capital may be lower and economic growth may be higher.
From the perspective of central banks, given appropriate structure and regulation,
securitisation can play a significant role in supporting both monetary and financial
stability. For example, in certain cases, high-quality asset-backed securities could ensure
better transmission of monetary policy, since a greater fraction of enterprises get access
to credit markets. In terms of financial stability, greater diversification in bank liabilities
may make banks' lending decisions less dependent on the business cycle. And it may
reduce borrowers' exposure to refinancing and liquidity risk. This could strengthen
banks' resilience and reduce systemic risk.
But how do we ensure that there is appropriate structure and regulation in the markets
for securities? In this context, following the financial crisis, the Financial Stability Board
proposed a set of measures aimed at greater resilience in securitisation markets.
[5] Amongst other aspects, there was coordination in the development of policies for
improving transparency and aligning incentives in securitisation. Furthermore, a recent
report of the European Commission on the functioning of securitisation regulation
indicates that transparency should facilitate due diligence. [6] With regard to
transparency and incentives, we can see clear nexus with the goals set out for
establishing European DataWarehouse.
3 European DataWarehouse and the role of the ECB
The Eurosystem played a key role in this process. On 16 December 2010, the ECB
Governing Council announced that it would implement loan-by-loan information
requirements for asset-backed securities in the Eurosystem collateral framework. The
announcement was followed by a letter, signed by then ECB President Jean-Claude
Trichet, addressed to parties interested in building and participating in a data
warehouse for asset-backed securities. In this letter, the Eurosystem recognised the
need for a loan-level data warehouse and expressed its intention of becoming a client
of this data warehouse.
Subsequently, six technical working groups with 30 to 40 market participants from
banks, originators, law firms, investors, and regulators came together to develop the
requirements for the different loan-level templates. These templates correspond to the
different ABS classes accepted as collateral by the Eurosystem. Finally, in 2012,
European DataWarehouse successfully went into operation.
4 Benefits of European DataWarehouse for market participants
The availability of granular data on the underlying loans for asset-backed securities has
dramatically improved transparency in the market. This helped to restore some of the
trust in this asset class that had been lost in the aftermath of the financial crisis. For
these improvements, it was crucial that the loan data could be assessed easily from a
single centralised access point. This is exactly what European DataWarehouse provided,
thus making it possible to rebuild the asset-backed securities market in the euro area.
Let me put this achievement into figures. Today, European DataWarehouse contains
data from 16 countries on more than 1,600 securitisation pools, of which almost 600
are currently eligible as collateral in the Eurosystem framework. With more than
94 million underlying assets, the total balance of all transactions covered by European
DataWarehouse amounts to over EUR 1,300 billion. At over 800 pools, residential
mortgage-backed securities comprise the largest share. They are followed by auto loan
and auto lease asset-backed securities, which consist of more than 300 pools. More
than 200 pools are related to small and medium-sized enterprises.
European DataWarehouse has also devoted exceptional effort toward the continuous
improvement of data quality. In doing so, it has evolved from simply a data warehouse
to a full service provider offering more and more user-friendly tools that make accessing
and analysing the loan-level data both quicker and easier.
Easier access to the data is of particular importance for the Bundesbank. The data on
individual loans play a crucial role in monitoring asset-backed securities listed in
Germany as well as in the due diligence process for new issuances from German
originators considered by the Eurosystem for its ABS purchase programme. Our experts
in Directorates General Markets and Banking and Financial Supervision regularly carry
out prudent and diligent analyses of the risks involved in securitisation. These analyses
depend critically on access to information: there can be no due diligence without
transparency.
Furthermore, in the case of public securitisation, the EU securitisation regulation
implemented in 2017 requires originators to regularly disclose all materially relevant
data on the credit quality and performance of the underlying exposures to a
securitisation repository. [7] This means that the legislative bodies of the European
Union also recognised the value of access to granular loan-level data. Since European
DataWarehouse had already proven its ability in storing this data and providing its
customers with quality service, it was the logical choice to serve as the single access
point for this data. Overall, European DataWarehouse is now a widely trusted,
knowledgeable and important player in the European securitisation market.
5 The role of European DataWarehouse in research
However, due diligence and monitoring are not the only purposes for which loan-level
data can be used. They also yield tremendous potential for research. This potential is
fully recognised by Bundesbank researchers.
A prime example is the work of Carina Mössinger, Philipp Klein, and Andreas Pfingsten.
[8] They analysed whether an increase in transparency reduces the agency problems
inherent in securitisation. For this purpose, they employed a dataset obtained from
European DataWarehouse. It consisted of 107 ABS pools backed by more than
2.8 million loans for small and medium-sized enterprises. Their analysis focused on
loans backed by small and medium-sized enterprises because these loans are especially
prone to information asymmetries.
The authors found that the transparency gains brought about by European
DataWarehouse do indeed have a valuable impact for investors. If affected by the novel
transparency regime, securitisation pools performed better with regard to their rates of
loss, default, and delinquency. Furthermore, pools affected by the transparency regime
are more diversified than others with respect to single-name concentration, business
types, and industries. Carina Schlam, née Mössinger, will present her latest work with
Philipp Klein and Andreas Pfingsten at the European DataWarehouse research webinar
in December.
Other researchers who employed data from European DataWarehouse also came to
similar conclusions. In fact, in an earlier work, Aytekin Ertan, Maria Loumioti, and
Regina Wittenberg-Moerman found that increasing transparency creates incentives for
banks to improve their credit practices. [9]
6 European DataWarehouse and climate policy
In addition, market participants have identified European DataWarehouse and its
services as a potential catalyst for combating future challenges such as climate change.
Securitisation, especially for small and medium-sized enterprises, can build a bridge
between credit-driven bank financing and capital markets.
In my view, securitisation could be a very important instrument for tackling the
financing challenges associated with the green and digital transformations of European
economies. Accordingly, the Bundesbank hosted an event about the role of
securitisation for sustainable finance in Düsseldorf in the middle of October.
[10] Furthermore, in collaboration with the German Federal Ministry of Finance and
Federal Ministry for Economic Affairs and Climate Action, we have established an expert
group to explore the potential of securitisation for small and medium-sized banks.
Loan-level data could potentially play a key part in investors' evaluations of the
sustainability of a given asset-backed security. In this respect, European DataWarehouse
also has great potential to play a major role for ABS markets in the future.
7 Closing remarks
Ladies and gentlemen,
Let me conclude with a quote from another famous economist and Nobel laureate.
Joseph Stiglitz once said: "Information costs are no less real than production costs." [11]
This is why economic transparency is referred to as a key pillar of international
competitiveness. In this respect, European DataWarehouse has made an important
contribution to European competitiveness over the last ten years. I am confident that
European DataWarehouse will also help us to overcome the economic challenges that
we will face in the years to come.
Thank you for your attention.
Footnotes:
1. Arrow, K. J. (1972), Gifts and Exchanges, Philosophy and Public Affairs, Vol. 1, No.
4, pp. 343-362.
2. Shin, H.S. (2009), Securitisation and financial stability. Economic Journal, 119, pp.
309-332.
3. Bord, V. M. and J. A. C. Santos (2015), Does Securitization of Corporate Loans Lead
to Riskier Lending? Journal of Money, Credit and Banking, Vol. 47, Issue 2-3, pp.
415-444.
4. European Central Bank and Bank of England (2014),"The impaired EU securitisation
market: causes, roadblocks and how to deal with them", discussion paper, March.
5. Financial Stability Board, "Strengthening Oversight and Regulation of Shadow
Banking: An Overview of Policy Recommendations", 29 August 2013.
6. European Commission, Report from the Commission to the European Parliament
and the Council on the functioning of the Securitisation Regulation, 10 October
2022.
7. Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12
December 2017 laying down a general framework for securitisation and creating a
specific framework for simple, transparent and standardised securitisation, and
amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations
(EC) No 1060/2009 and (EU) No 648/2012.
8. Klein, P., Mössinger, C. and A. Pfingsten (2021), Transparency as a remedy for
agency problems in securitization? The case of ECB's loan-level reporting initiative.
Journal of Financial Intermediation, Vol. 46.
9. Ertan, A., Loumioti, M. and R. Wittenberg-Moerman (2017), Enhancing Loan
Quality Through Transparency: Evidence from the European Central Bank Loan Level
Reporting Initiative. Journal of Accounting Research, Vol. 55 No. 4, pp. 877-918.
10.
https://www.iwkoeln.de/institut/veranstaltungen/markus-demary-die-bedeutungdes-kapitalmarkts-und-der-verbriefung-fuer-die-transformation-der-wirtschaft-innrw.html
11. Stiglitz, J. E. (1985), Information and Economic Analysis: A Perspective. The
Economic Journal, Vol. 95, Supplement: Conference Papers, pp. 21-41.