From Bank-Based to Market-Based Long-Term Finance? the Ecb's Push for Institutional Change in the European Securitization Market

In the aftermath of the financial crisis of 2008/09, most scholarly and and political attention has been devoted to the question of financial stability. Behind the issue of crisis prevention, however, looms the still larger question of how to build a financial system that serves the ‘real’ economy, rather than the other way around. Here, ‘long-term finance’ has emerged as a dominant theme on the agenda of economic policymakers – the question of how to overcome the short-term orientation that has come to dominate capital markets and to create the conditions for firms to have access to ‘patient capital’. One of the most far-reaching governmental attempts at establishing such conditions has been the European Central Bank’s (ECB) push to revive the securitization market in the euro area. Crucially, however, this initiative seems to be at odds with the literatures on varities of capitalism and financialization, which generally associate patient capital with ‘coordinated market economies’ and ‘bank-based’ financial systems. Securitization – the bundling and selling of loans, generally in the form of asset-backed securities – is a key feature of a ‘market-based’ financial system, and is generally seen as reducing the capacity of the banking system to provide patient capital in the form of (‘on-balance-sheet’) loans. Yet a joint discussion paper by the ECB and the Bank of England on “The case for a better functioning securitisation market in the European Union” has recently identified pension funds and insurance companies as “natural buyers of long-term assets”, emphasising the contribution securitization can make to broadening the “pool of assets that are genuinely low-risk from a credit perspective, alongside government bonds” (ECB and Bank of England 2014: 7). The two central banks clearly view securitization and patient capital not as contradictory, but as complementary elements of what is best described as a model of ‘market-based long-term finance’. Using data from interviews with central bank staff and market participants, this paper traces the origins of the ECB’s initiative to revive the securitization market in the euro area to the aftermath of the collapse of Lehman Brothers in late 2008, and details the formulation, and gradual phasing in, of loan-level information requirements for asset-backed securities. By focusing on a hitherto unexamined process of institutional change at the intersection of political and market institutions, the paper makes an original contribution to ongoing political science debates on institutional change in the wake of the global financial and economic crisis.