Financing the economic transition – Building bridges between sustainability, growth and monetary stability
2022 +++ A geopolitical turning point +++ Creeping stagflation +++ Sustainability and security as global priorities +++ Banks and capital market financing in transition +++ Asset-based finance for the transformation
The attack on the foundations of democracy and international law, the geopolitical turning point and the humanitarian catastrophe brought about by the war in Ukraine do not allow us to return to business as usual. It has had a severe impact on security policy, energy supply and growth, the magnitude of which remains difficult to predict. The conflict is affecting key issues of European policy such as action on climate change, the European Capital Markets Union and financial market stability. And last but not least, the problem of humanity’s dependence on fossil fuels is taking on a new, geopolitical dimension, and the need to transition away from them is becoming more urgent.
At this critical juncture, we need to focus more than ever on the challenges which the economic transition of recent years has been facing. In fact, rather than fading, these issues actually need to be addressed more quickly:
1 Effects of the pandemic
Over the course of the pandemic, the economy recovered and industry experienced high employment rates and full order books. However, this development is now clouded by a longer-term disruption and reorganisation of global value and supply chains. The pandemic has also changed the way we work: working from home, domestic life and digital networking have taken on a whole new meaning and will have an impact on economic life. But the term ‘digitalisation’ goes far beyond this with the expected lasting effects on business processes and models in the real and financial economy.
2 Sustainability and digital transformation
To achieve its sustainability goals, which are now also geostrategically relevant, the European Union is continuing its regulatory course. The transparency requirements arising from regulation for sustainable finance pose major challenges for both the finance industry and the real economy. In this context, sustainable finance could prove to be a high threshold for financing the real economy. In addition, there are rapid developments around DLT technologies, above all blockchain, decentralised finance and digital currencies, which are keeping us on our toes. Despite all the challenges: The transformation to a sustainable economy also holds opportunities for the realisation of the European Capital Markets Union.
3 Monetary and fiscal policy
The European Central Bank needs to address the implications of monetary and fiscal policy in times of the coronavirus. Is rising inflation a temporary or a longer-term phenomenon? How can the exit from ultra-loose monetary policy be initiated? These questions need to be re-evaluated in light of the further increases in the cost of energy and living due to the war in Ukraine. This raises the further question of how serious the consequences for the economy will be and how heavily the expected economic growth in 2022 could be affected. Lasting consequences for consumer behaviour are also to be expected against this backdrop.
4 Impact on banks, companies, consumers and credit markets
How are current developments likely to affect our heavily bank-based financing structure in Europe?
- First-round effects due to credit exposures related to Russia and Ukraine are likely to be bearable, but weigh on banks' capitalisation
- Secondary effects due to sanctions and rising energy, commodity and food prices will strongly depend on the extent of the war's course
- Decline in economic growth to the point of recession will affect credit ratings of companies and consumers, exacerbated by the ‘cost-of-living crisis’ that was already evident before the war began
- Due to inflation and the need for tapering, central banks have hardly any leeway left for monetary policy support
- Financing investments for further transformation requires intensive use of all financial instruments; European banking regulation should favour increasing capital market financing in this context
What does this mean for securitisation and asset-based finance instruments?
Asset-based finance can play an important role in financing the sustainable economy of tomorrow, as it is independent of the creditworthiness of financing institutions and businesses. In this environment, securitisations in particular will be able to make an important contribution to the liquidity and capital needs of the financial and real economy.
- Securitisation regulation – Securitisations are well positioned as a result of the review of the Securitisation Regulation, possible relief under the CRR and implementation of ESG for securitisations
- Quality segment STS – Given the growing financing needs combined with a positive market development in volume and performance, this market segment has established itself exceptionally well for both true sale and on-balance transactions.
- ESG & asset-based finance – Securitisation still lags behind due to unclear definitions, lack of ESG assets and data availability, but stimulus is expected from the EU Green Bond Standard and use-of-proceeds approach
- Transparency – The high level of market transparency and integrity in securitisation can be a competitive advantage over other forms of financing with a view to future reporting requirements
- Dynamics through digital business models and decentralised finance – Trend towards ‘using instead of owning’ mobile assets with impact on contract design (smart contracting), financing and settlement favours asset-based financing
- Transformation funds – Government-initiated financing programmes involving borrowers’ regular banks and private investors hold further potential for securitisations
- Tapering by central banks will probably lead to increased issuing activity
At the TSI Congress on 22 and 23 September 2022 in Berlin onsite & globally online, we will highlight the entire range of relevant topics and discuss them with market participants and as well as experts from politics and supervisory authorities from home and abroad.