EU Fannie Mae idea is bad answer to good question

The European Union is hunting for ways to fund the green transition and bolster digital investments. A new report led by former French central bank Governor Christian Noyer, which puts the required spending at close to 1 trillion euros per year, reckons boosting banks’ use of securitisation could help. He’s onto something, but the proposal for a European version of Fannie Mae and Freddie Mac shouldn't fly.

Noyer and a panel of French financial grandees will on Thursday recommend creating an EU-wide body to aid the slicing and dicing of mortgages, according to a draft summary of the report seen by Breakingviews. Convened by French Finance Minister Bruno Le Maire, the panel will advocate that banks offload relatively homogeneous assets like residential loans into a pool that would benefit from national-government guarantees, as do the U.S. housing behemoths. Next, the banks would funnel those assets into a pan-European body which would bundle the national loans into securities and sell them off in tranches to investors like pension funds.

It’s true that European securitisation markets have been moribund since 2008, which given its puny capital markets leaves the EU dependent on its often stodgy banking system for private finance. If lenders like Deutsche Bank DBK and BNP Paribas BNP could churn their balance sheets more rapidly, by parcelling up more loans and selling the pieces, they’d have more room to finance wind farms, data centres and other projects. The Noyer report says that a fully-functioning EU securitisation market could juice bank lending by 26%.

But replicating Fannie and Freddie on European shores would risk distorting mortgage prices or worse. The duo has been under government control since the 2008 financial meltdown – a crisis they contributed to, and which saw them require a taxpayer bailout. Even if building a European version of those controversial giants was desirable, it might not be possible given fragmented politics. If the government guarantees envisaged by Noyer’s plan came from national governments and lacked any limits, mega-banks in big economies like Germany and France could dominate, undermining the single market. If, in contrast, the state guarantees ended up being mutualised, that would cross a red line for fiscal conservatives.

There are other ways to boost securitised lending. The European Central Bank in March called for revisiting requirements for how such assets are counted on bank balance sheets, an idea also mentioned in the Noyer report. Bankers have told Breakingviews that a more modest-sized state-backed programme focused on small and medium-sized business loans might be more doable. It wouldn’t have the appeal of the French-favoured “big bang”. But reviving European capital markets requires achievable goals, not just big ideas.

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CONTEXT NEWS

A report commissioned by French Finance Minister Bruno Le Maire recommends creating a pan-European body to help banks sell securities backed by mortgage loans with national government guarantees, according to a summary seen by Breakingviews.

Le Maire asked former French central bank Governor Christian Noyer to come up with ways to jumpstart European Union capital markets. Other contributors include executives from Euronext, BNP Paribas, Amundi and AXA, as well as representatives from the European Investment Bank and the French accounting standards authority.

EU leaders called for “relaunching the European securitisation market, including through regulatory and prudential changes, using available room for manoeuvre”, in the conclusions of an April 17-18 summit in Brussels.

Former Italian Prime Minister Enrico Letta urged the EU to improve its securitisation framework to make it easier to use and more effective, in an April report on how to improve the bloc’s single market.