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

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In sharp contrast, the US mortgage market is largely a securitised market, where the great majority of mortgage funding originates from the capital markets. There have however been some questions over the future of the US mortgage market, given the domination of state sponsored enterprises which benefit from a number of competitive advantages that distort market prices. It is widely said that the regulation of the US secondary mortgage market creates an undesirable government subsidy to mortgage lending. Another issue in the US mortgage market is the size and influence of the GSEs. Together, Fannie Mae and Freddie Mac have more than $2 trillion in debt outstanding, and have guaranteed another $3 trillion in mortgage-backed securities. In addition, they have huge derivative positions to hedge their retained portfolios. Concerns have been raised about possible systemic risk to the financial system. Looking at the US can give us a number of insights with regard to the development of secondary mortgage funding in Europe. If we consider for instance that the rise of securitisation in the US came as a result of the consequent lack of capital to finance mortgage loans following the 1980’s thrift crisis, it could be concluded, given that there continues to be no such shortage of capital in Europe, that there isn’t the same need in Europe for similar extensive securitisation. In addition, we can consider that the interest rate instability that triggered the US thrift crisis is not an issue in Europe today, where low and stable interest rates have become the norm. This hasn’t stopped a number of initiatives being established in Europe to attempt further developing the use of secondary mortgage markets by providing pan-European platforms. The two currently in existence are that of the European Mortgage Finance Agency, as mentioned above, and that of Kreditanstalt für Wiederaufbau (KFW), which is currently securitising retail mortgages of foreign banks via its Provide Platform. These two initiatives are in fact very much the replication of the US GSE system as they both rely on state backing. The EMFA would function with an EU guarantee, and KFW is a German bank that is 80% owned by the German government and 20% by one of Germany’s Bundesländer. The question is whether any European platform could exist without a state or state-backed entity to take up the credit risk, given the difficulty for individual investors to assess loan quality in multi-origin loan portfolios. Yet, as experts in the EU’s Forum Group have made clear (as reported above) there is no appetite in Europe either from the Commission, or from experts in European mortgage credit markets, to have in place a state-backed system such as exists in the US. This means that mortgage loans in Europe will have to continue being funded on the basis of the financial strength of banks or the intrinsic quality of the securities. There is also the added dimension that state aid in the form of guarantees is in fact outlawed in the EU 317 . But if the trend of mortgage funding via MBS is anything to go by, it could be expected that a demand lead push could in the future give rise to increased securitisation of mortgage loans at least at the level of individual Member States. This trend could further be accentuated if securitisation brings the promise of cheaper mortgage funding. Looking to the US however reveals that in practice, such results are far from assured. The growth of the securitisation of mortgage loans in the US has not narrowed the interest-rate spread between mortgage loans and Treasury bonds over the years. One possible explanation is that greater rates of mortgage prepayment have increased the prepayment risk inherent in mortgage backed securities contracts, offsetting any reduction in the cost of financing mortgage loans 318 . 317 Article 87 and 88 of the EC Treaty. 318 “The costs and benefits of integration of EU mortgage markets”, London Economics, August 2005. 120
6.2.3 Small business/ SME lending 319 6.2.3.1 United States 6.2.3.1.1 The main means of financing small businesses in the US Comprehensive and up to date data that directly measures the financing activities of small businesses in the US is hard to come by. Commentators on the financing of small businesses in the US use as their main data source the Survey of Small Business Finances 320 (SSBF), which collects information on businesses with fewer than 500 employees. This survey, for which the most recent available results date from 1998, provides the most comprehensive information on small business finance available in the US. Though the survey is not recent, its results are used as the main source of data in a 2002 report to Congress on the availability of credit to small businesses 321 , and the report gives the explanation that “past surveys suggest that the 1998 results should still provide a good picture of current small business behaviour because patterns in the use of credit by small businesses change slowly”. The following comments are also based on the 1998 SSBF. Small businesses in the US rely substantially on insider finance in the form of owner’s capital, owner’s loans, and retained earnings 322 . Otherwise they roughly rely equally on both equity and debt, the biggest equity category being funds provided by the principal owner (about two-thirds of total equity) 323 . These are firms with very high growth potential, often in knowledge-intensive high tech industries, who principally access the private equity markets for early-phase financing. External finance as represented by ‘angel finance’ and venture capital, contributes around 5% of small business finance in the US 324 . Looking at private debt in more detail, the results of the SSBF survey reveal that most small businesses in the US use traditional types of credit, including loans taken down under lines of credit, mortgages used for business purposes, equipment loans, motor vehicle loans, capital leases, and “other loans.” In 1998, 55% of small businesses used at least one of these traditional forms of credit. Credit lines 325 were the most common traditional form of credit used by small businesses in 1998. They were used by 27.7% of all firms and accounted for 34.1% of the total dollar value of credit outstanding. Motor vehicle loans were the second most commonly used type of traditional credit, with 20.5% of all firms using them. These loans, however, accounted for only 5.5% of the total amount of outstanding credit because motor vehicle loans are small compared with other types of credit. Approximately 13.2% of all firms had mortgage loans for business purposes, making this the third most commonly used type of credit. In terms of dollar amount, mortgage loans were the largest form of credit, accounting for more than 35% of outstanding credit. For the vast majority of small businesses in the US, their access to external finance is nearly entirely limited to the private debt markets. For a relatively small number of firms, however, the market of choice for external finance is the private equity market. 319 While there is no single definition of a small business in the US, a broad guideline used by the US Small Business Administration (SBA) is a firm or enterprise with fewer than 500 employees. In the European Union, SMEs are defined as having less than 250 employees. The analysis that follows therefore compares small businesses in the US to SMEs in the EU. 320 The Survey of Small Business Finances (SSBF) is conducted by the Board of Governors of the Federal Reserve System. It collects information on small businesses (fewer than 500 employees) in the United States. Owner characteristics, firm size, use of financial services, and the income and balance sheets of the firm are just some examples of the types of information collected. Working papers and methodology reports, codebooks and other related documentation, and the full public data sets are available for the 1998, 1993, and 1987 SSBFs. Results of the 2003 survey had still not been released at the time of writing this study. 321 “Report to the Congress on the Availability of Credit to Small Businesses”, Board of Governors of the Federal Reserve System, September 2002. 322 “Use of equity capital by small firms – findings from the surveys of Small Business Finances (1993 & 1998)”, Dr Charles Ou, Office of Advocacy, US Small Business Administration, May 2003. 323 “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure”, Berger and Udell, Economic Journal, 2002. 324 “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure”, Berger and Udell, Economic Journal, 2002. 325 Consists of an agreement between a borrower and a lender that permits an extension of credit, up to a certain limit, without having to complete a loan application for each amount of money borrowed. The borrower may make as many purchases as desired as long as the limit of credit is not exceeded. 121
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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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The best execution rule was first m
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Page 122 and 123: 6.2.3.1.2 Lenders to small business
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Page 150 and 151: MoU Memorandum of Understanding OTC
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A comparative analysis of the US and EU retail banking markets - Wsbi

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