A comparative analysis of the US and EU retail banking markets - Wsbi

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Funding by retail deposits represent upwards of 80% of total residential outstanding stock of home loans in the UK, France, the Netherlands and Italy 310 . There are a number of possible explanations as to why deposits continue to be the most common funding instrument for home loans in Europe: 35% 30% 25% 20% 15% 10% 5% 0% There are exceptions though. Germany, Denmark and Sweden all have substantial mortgage bond markets. And although RMBS activity in Europe is very low, MBS markets are becoming quite active in the Netherlands, Spain, Italy, the UK, Ireland and Belgium (where new issues of MBS represented, respectively, 21%, 17%, 15%, 14%, 13% and 13% of new residential mortgage loans in 2003). The growing popularity of MBS funding in Europe is possibly due to customers increasingly seeking alternative and more lucrative ways to invest their savings. This growing trend can be seen in graph 17, which also reveals however that the share of new mortgages financed via mortgage bonds has declined between 1998 and 2002. The result of these two opposing trends for that period can also be seen in the graph, which reveals that the proportion of mortgage loans financed with retail and wholesale funds relative to secondary funding has remained stable (figures for graph 17 can be seen in table AD in the table annex). Graph 17: Share of new mortgages financed in secondary markets in the EU 1996 1997 1998 1999 2000 2001 2002 1. The high savings rate in a majority of European countries, providing a huge mortgage funding source. 2. Retail deposits are a cheap source of funding. 3. Deposits are generally not sensitive to bank rating, so the costs of deposits will not rise during a downturn. Contrary to this, if a bank, or its mortgage bonds, are downgraded or traded at wider spreads, the returns on mortgage lending can be severely affected if funding is via RMBS or bonds. 4. Deposit maturities follow quite well changes in maturities of home loans triggered by rate changes, falling when prepayment is triggered by a rate fall, and increasing as rates rise and maturities lengthen. 5. Covered bonds are only available in certain European countries. 6. Residential mortgage backed securities are very well developed in some European countries such as the UK and Spain, but less so in others. Much of this disparity derives from a lack of market liquidity and sophistication on the part of lenders and investors. This, in turn, is often a function of the high costs of securitisation transactions in some countries, which has deterred lenders from entering this market 311 . Nevertheless, there is an interest in Europe to look at ways to further develop the use of capital markets to fund mortgage loans. The European Commission’s Forum Group on Mortgage Credit 312 , which brought together a number of mortgage credit experts to look at ways to improve the integration of European mortgage markets, have for instance suggested exploring the possibility of the development of a ‘liquid and dynamic’ pan-European secondary mortgage market in Europe 313 . ■ Mortgage Bond Funding ■ MBS Funding ■ Total Secondary Market Funding Source: “The costs and benefits of integration of EU mortgage markets”, London Economics, August 2005 310 “Risk and funding in European residential mortgages”, Mercer Oliver Wyman, April 2005. 311 Points 3, 4 and 6 from: “Risk and funding in European residential mortgages”, Mercer Oliver Wyman, April 2005. 312 The Forum Group was created by the internal market Directorate General of the European Commission in 2003. The Group included more than twenty experts from eleven Member States. It was set up to advise the Commission on how to make progress towards a European market for home loans, which would make it easier for home buyers to save money by choosing mortgage products from lenders anywhere in the EU. National consumers associations, the credit and insurance sectors, and other stakeholders such as European notaries and chartered surveyors were all represented in the group. 313 See “The integration of the EU mortgage credit markets”, Report by the Forum Group on Mortgage Credit, European Commission, 2004. 118
In its report to the Commission, the Forum Group acknowledges the existence of a number of successful domestic funding vehicles 314 in several EU countries and mentions too the idea of a European Mortgage Finance Agency (EMFA), modelled on the examples of the US Government Sponsored Enterprises Freddie Mac and Fannie Mae, which has been proposed as a way of replacing what EMFA considers to be a fragmented European MBS market with a more standardised pan-European one 315 . Kreditanstalt für Wiederaufbau (KFW) is the (only) other existing initiative in Europe which aims to further develop the use of secondary mortgage markets by providing a pan-European platform 316 . Like the EMFA, it functions as the US system in that KFW is 80% owned by the German government and 20% by one of Germany’s Bundesländer. The existence of state guarantees in both these European initiatives is not a coincidence. These guarantees mean that while investors take up the prepayment risk, the credit risk is taken up by the agencies that guarantee all payments to the investors. Such a guarantee becomes all the more important in the context of the pooling of mortgage loans from different countries. This is because the multi-origin characteristics of the loans would make it more difficult for each participating investor to assess the relative quality of the loans that make up that pooled portfolio. The question then is whether the lack of such a (state) guarantee wouldn’t deter investors from engaging in cross-border lending activities. In its conclusions however, the Forum Group makes clear that it is not in favour of seeing such a model being replicated in Europe, stating explicitly that it is opposed to any initiative aimed at introducing any form of institutional guarantee and support (from either the EU or national governments) that might distort competition or create barriers within the national and European markets. 6.2.1.3 Comparison 6.2.1.3.1 Home loans in the US and EU economies Credit to buy residential property represents the main type of credit to households in both the EU and the US, though the share of home loans to total outstanding credit does vary quite significantly from country to country in the EU. In terms of size, the US market for home loans is quite a bit bigger than the EU’s, each representing respectively, €6.1 trillion and €3.5 trillion. The EU market is also much smaller relative to GDP (38%) than that of the US (63%) (for comparative figures from 2000 to 2003, see table AC in table annex). Nevertheless, some EU countries of the Eurozone have a similarly high ratio of home loans to GDP as the US: this ratio is 88% in the Netherlands, 78% in both Ireland and Portugal and 76% in Belgium. Thus, arguably some EU countries have similarly extensive home loan markets as the US. 6.2.1.3.2 Lenders of home loans in the US and EU economies While retail banks are the main lenders and players in the European home loan market, this is not so in the US, where specialised mortgage banks are the main lenders, and GSEs the main sellers of mortgage loans via the secondary mortgage markets. 6.2.1.3.3 The funding of home loans in the US and EU economies Retail bank deposits continue to be the largest source of home loans in Europe. Further, recent trends reveal that the proportion of outstanding home loans that is funded via retail deposits has remained constant in the last two decades. There are a number of possible explanations (see main text) why this is so, and why, in spite of very successful secondary loans markets existing in certain countries in Europe, funding via secondary markets remains low, and in the case of MBS, very low. Trends however also reveal that a growing proportion of new mortgage loans are funded via MBS. 314 Such as facilities like the French CRH (Caisse de Refinancement de l’Habitat), the Spanish AyT (Ahoro y Titulización), mortgage banks such as Danish Totalkredit, and the Italian Credit Circle. 315 “The integration of the EU mortgage credit markets”, Report by the Forum Group on Mortgage Credit, European Commission, 2004. 316 KFW has expanded beyond the German issuance that it was created to foster by securitising foreign bank mortgages via its Provide platform ( based in Dublin) i.e.: for the UK’s egg bank and for the Netherland’s NIB Capital Bank (both in 2003). 119
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September 2006 RESEARCH A COMPARATI
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IE UK FR BE NL LU DK DE SE CZ AT SL
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The following WSBI/ESBG committees
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4 Regulation and supervision compar
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6.5 Issues of competition in retail
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To finish, if we had to pick from a
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In the US, credit institutions have
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Following the same logic, the EU co
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In that context, it is tempting to
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3. INSTITUTIONAL COMPARISON 3.1 Sec
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The market share of the US banking
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FDIC-insured commercial banks are i
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The subsidiary stock institution is
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Regulatory reform over the past thi
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State credit unions were first exem
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There has however been much effort
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3.2.2.2.2.2 Ownership and corporate
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Hermann Schulze-Delitzsch and Fried
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In contrast, building societies in
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The commitment of savings banks is
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4. REGULATION AND SUPERVISION COMPA
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In addition, for regulations define
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The European Parliament has to be k
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In fact, it should be mentioned her
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As far as coordination at the feder
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Despite the trend towards the estab
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Another important factor in the cho
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In the European Union, contrary to
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Although younger than CESR, both CE
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4.2.5.1.1.1.1 Limitation of the geo
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4.2.5.1.1.3 Recent trend: regulatio
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Another important common feature be
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A comparative analysis of the US and EU retail banking markets - Wsbi

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