BBA_Agenda_for_growth_WEB

Financing European Growth
July 2014
About the BBA
The BBA is the UK’s leading association for the banking sector
representing the interests of more than 250 member organisations with a
worldwide presence in 180 countries.
Our member banks make up the world’s largest international banking
cluster, operating 150 million personal accounts for UK customers and
contributing over £60 billion annually to UK economic growth.
We represent our members to policymakers, regulators, the media and all
key stakeholders across the UK, Europe and beyond, working together
to promote a legislative and regulatory system that helps customers,
promotes growth and raises standards in the industry.
For more information on becoming a member and working with the BBA,
visit: www.bba.org.uk/membership or contact: Richard Adler, Relationship
Director, richard.adler@bba.org.uk
© BBA 2014
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BBA
FinancingEuropeanGrowth
Executive summary
Chapter 1: Growth and jobs in the EU
Chapter 2: Infrastructure financing
Chapter 3: Exporting for growth and supporting
supply chains
Chapter 4: Sources of finance for mid-sized businesses
Chapter 5: Kick starting the EU ABS securitisation market
Chapter 6: Financing of SMEs
Chapter 7: Maintaining the international competitiveness of
the EU’s capital markets
Contents
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37

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BBA
The most urgent task for Europe is to generate a lasting recovery and
permanently stronger economic growth. The financial crisis has resulted in
high unemployment levels in parts of Europe which could undermine the
fabric of society and youth unemployment rates which will potentially leave
permanent scars. Without urgent action, the danger is of a ‘lost generation’
of disaffected young people.
While circumstances in individual member states vary, the role of
the new European Parliament, the European Commission under its new
leadership, and other European institutions, including the European Central
Bank (ECB) and European Investment Bank (EIB), will be vital.
1
Europe has
to act collectively to achieve the economic improvement that its citizens
deserve. Given the high degree of economic integration between Member
States each has an interest in promoting the success of other Member
States. This must be the time when the EU pulls together.
This document sets out a range of ideas to boost the growth of the
European economy. Our proposals will strengthen the financial system
across Europe and ensure it is deeper, more diverse and better equipped
to support the needs of businesses operating within and trading with
Europe. A healthy business sector, properly and appropriately financed,
will support the investment and jobs needed for a sustained revival and
prosperity that benefits everybody.
Executive summary
1
See p46 onwards for a full
glossary of the terms used
throughout this report.

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This document has three broad aims:
·· To set out the scale of the economic challenge
·· To describe the role that diversified sources of finance can play in the
EU’s growth agenda
·· To argue for an appropriate balance between the regulations needed to
achieve financial stability and the need to ensure that the flow of finance
to those who need it is not reduced.
The economic challenge
The scale of the immediate problem is well known. EU unemployment
stands at 10.4%, with the Euro area figure at 11.7% (April 2014). People
are often less familiar with the fact that Europe’s economic problem has
been building for many years. Even before the global financial crisis, the
low point for EU unemployment was more than 6.5%, with the rate in the
Euro area more than 7%. This reflected structural issues and a slowdown
in growth stretching over many decades.
In the 1960s, Europe (the EU-15), could boast a growth rate exceeding
that of the United States, while in the 1970s EU and US growth rates were
similar. Since then, however, Europe has suffered progressively slower
growth, averaging roughly a percentage point lower than that of the US
over more than three decades. Cumulatively this adds up to a huge loss of
economic output and potential for Europe. Growth forecasts, which point
to a medium-term expansion in the EU of no more than 1% a year, suggest
the problem remains.
As is widely recognised in the Commission and Parliament, the EU
needs a wide-ranging reform agenda to lift long-term growth, including
supply-side reforms and more flexible labour and product markets. This
increased microeconomic flexibility is particularly required at this time
given the constraints acting upon macroeconomic policy. We also strongly
believe that better finance has a key role to play in a brighter economic
future for Europe.
Financing European growth
Diversifying and expanding the sources of finance to business will be vital
to secure a sustained economic revival in the EU. It might be expected that
the BBA would advocate an expansion of traditional lending. Over-reliance
on overdrafts and loans is, however, a problem for European business, in
comparison with the wider range of finance sources available in the United
States. Banks are responsible for more than 70% of total financing in
Europe whereas in the US capital markets and non-banks supply 70% of
finance and banks account for only 30% of total lending.
To support stable growth, businesses must have access to
complementary sources of funding which provide “the right finance at the
right time”. Sources of finance should be diversified and private sources
of long-term capital mobilised. It must also be recognised that there are
huge variations in financing needs from micro-businesses through to larger
medium companies and midcaps.

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BBA
The BBA believes the role banks play in supporting financing will evolve.
Banks will remain the primary source of debt finance for SMEs. The
banking industry will also continue to develop its range of alternative debt
products for business. These include asset finance, invoice finance and
supplier finance.
In the UK the banks have supported the Business Growth Fund to
provide long-term equity finance to businesses with a turnover of £5 million
to £100 million. The banks will also seek to connect up the financial
landscape by working with other finance partners. These include peer-to-
peer lenders and “angel” investors.
We also believe that there is also an important future role in Europe
for both securitisation and elements of market based finance such as
Money Market Funds (“MMF”s). Both suffered reputational damage in
the crisis, largely because of events in the United States. In contrast, the
experience in European originated securitisation was significantly better.
A well-functioning securitisation market will help banks to play their part in
financing growth by allowing them to diversify their funding sources and
freeing up capital for new lending.
Our recommendations include:
·· Measures to support infrastructure finance where there are clear market
failures in the provision of long-term finance
·· Measures to strengthen the export potential of European businesses by
removing some of the constraints to trade finance provision
·· Measures designed to allow the development of more market-based
finance across Europe, including kick starting the EU securitisation
market for ABS (asset-backed securities)
·· Measures to support the financing of SMEs, including increasing the
diversity of funding sources and ensuring SMEs are “investment ready”,
through mentoring programmes
·· Measures designed to complete the reform of Europe’s financial market
infrastructure and maintain its competitiveness.
In many cases these measures involve collaboration between
banks, other financial institutions, such as pension funds and insurance
companies, as well as official bodies, such as the European Investment
Bank. Only by working together will we be able to overcome the barriers to
better and broader financing in Europe.
Balancing growth and financial stability
Alongside the positive proposals in this document, which we believe will
improve access to finance and result in more investment, growth and jobs,
we will also argue strongly that it is vital to avoid measures that will have
the effect of undermining the competitiveness of Europe’s capital markets
or restrict the development of alternative sources of finance.
We believe the Transatlantic Trade and Investment Partnership (TTIP)
represents an important opportunity to improve regulatory coherence.
We stress the need for EU reform of shadow banking (market-based
finance) to be driven by the Financial Stability Board (FSB) agenda and to

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not undermine innovation in financing. On completing the single capital
market we believe the EU must continue to work hard on coordinating
financial regulation and ensuring that they work with third countries to align
regulatory regimes as far as possible.
The Financial Transaction Tax (FTT) is a tax on growth that would
not achieve its stated objectives. As proposed it has considerable extra-
territorial reach and should be reconsidered.
EU action, particularly in the area of retail financial services, should be
governed by a rigorous assessment of subsidiarity and proportionality with
action only being taken where the benefits can be clearly demonstrated.
Wholesale markets by their nature are cross-border in that there are fewer
participants and a need to search for liquidity outside domestic markets. In
contrast, retail markets are less concentrated, characterised by consumers
with a home-country bias and subject to distinct cultural traditions and
public policy choices.
Conclusion
We believe that if banks, other financial institutions, EU institutions, officials
and politicians work together, we can better finance Europe’s recovery and
achieve the right balance between growth and financial stability. This is an
important moment for Europe. We must not let it pass.

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BBA
Recommendations
How diversified sources of finance can support growth
1. Promote long-term infrastructure finance by increasing the size and
scale of European Investment Bank guarantees and ensure capital and
requirements for long-term investors do not unduly constrain activity.
2. Reduce capital weightings on trade finance assets recognising their
strong on-going performance pre and post-crisis.
3. Ensure capital rules do not constrain direct lending to mid-sized
businesses and examine mechanisms to develop a medium-sized
bond market ensuring detailed elements of MiFID do not constrain
such growth.
4. Develop a single consistent definition for “qualifying securitisations” and
make changes to the capital and liquidity treatment of those assets.
5. Promote more angel investing across Europe, in addition attempt to
replicate programmes such as the Business Growth Fund and the
Santander Breakthrough programme could be replicated in other
member states.
6. Replicate programmes designed to help businesses become more
“investment ready”.
7. Expand the reach, capacity and flexibility of EIB and EIF schemes.
8. Promotional banks (such as KfW and the British Business Bank) should
co-ordinate the communication of national and EU schemes available
to SMEs.
Maintaining the competitiveness of EU capital markets and the
single market issues
9. The BBA advocates the inclusion of financial services within the
Transatlantic Trade and Investment Partnership (TTIP) to improve
regulatory coherence and deliver better outcomes for users of
financial services.
10. The implementation of the FSB regulatory agenda around
shadow banking (market based finance) should avoid unintended
consequences which undermine a more diversified financing system.
11. The FTT is a tax on growth which would not achieve its stated
objectives. As proposed it has considerable extra-territorial reach
and should be reconsidered.
12. The EU must continue the work with relevant third countries to align
regulatory regimes as closely as possible. Ensuring international
coherence of regulation remains an important goal and will help to
make the region attractive to investors and businesses.

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1.1 The economic context
Growth has disappointed in Europe for decades
The growth rate of the European economy has been slowing for
successive decades. Growth rates have slowed across the developed
world but European growth rates have been even slower.
Table 1: GDP growth in Europe has been in decline for decades
(GDP in market prices)
GDP growth 1961–1970 1971–1980 1981–1990 1991–2000 2001–2010 2011–2015
EU–15 4.8 3.1 2.4 2.3 1.2 0.9
Germany 4.4 2.9 2.3 1.9 1.0 1.6
Spain 7.3 3.5 2.9 2.8 2.0 0.1
France 5.7 3.7 2.4 2.0 1.1 0.9
Italy 5.7 3.8 2.4 1.6 0.4 -0.4
United Kingdom 2.8 2.0 2.8 3.0 1.6 1.7
United States 4.2 3.2 3.3 3.5 1.6 2.5
Gross domestic product at market prices
Million euro, chain-linked volumes, reference year 2005 (at 2005 exchange rates)
Source : Eurostat
Chapter 1
Growth and jobs in the EU

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BBA
Europe has recovered more slowly from the global financial crisis
The Global Financial crisis in 2008–9 had a very significant impact on the
level of income everywhere in the world. In Europe we saw an aggregate
GDP fall of more than four per cent from peak to trough and as is often the
case following a financial crisis
2
the recovery path is gradually taking years
to get back to the previous GDP peak, and even longer to get back to the
previous growth trajectory.
Figure 1: US growth has outperformed EU growth 1999–2013
(market prices, 1999=100)
1990 2000 2010
Euro area
US
80
90
100
110
120
130
140
GDP (market prices, indexed 1990=100)
Source: Eurostat
Slow growth matters because it exacerbates the fiscal predicament
many European countries have found themselves in. Public sector deficits
have risen across the Euro area and debt levels are now running close to
or above levels which may damage the long-run growth potential of many
Euro area countries.
2
See Reinhart and Rogoff,
This Time is Different:
Eight Centuries of Financial
Folly, 2011.

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Figure 2: EU government deficit is still recovering from a slump
following the crisis [debt as % of GDP]
-8
-7
-6
-5
-4
-3
-2
-1
0
201320122011201020092008200720062005200420032002
EU (28 countries)
Source: Eurostat
Figure 3: Government debt has risen sharply since the crisis
[debt as % of GDP]
40
50
60
70
80
90
100
201320122011201020092008200720062005200420032002
EU (28 countries)
Source: Eurostat

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BBA
As well as limiting the fiscal room for manoevure, low growth has
significant implications for labour markets.
Labour market recovery is only just beginning
We have seen alarming developments in labour markets with rates of
unemployment in some economies reaching very high levels.
Figure 4: Unemployment rates are very high [Euro area, EU, Italy
and Spain 2006–2014]
Spain
Euro area
5
10
15
20
25
30
2006 2007 2008 2009 2010 2011 2012 2013 2014
Italy
EU
Source: Eurostat
Figure 5: Unemployment is particularly high for under-25s
[Euro area, EU, Italy and Spain 2006–2014]
10
20
30
40
50
60
2006 2007 2008 2009 2010 2011 2012 2013 2014
Euro area
Italy
EU
Spain
Source: Eurostat

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More business investment needed
In aggregate, Europe has seen weak business investment in recent years.
Weak investment locks in low growth. Financing growth via increased
levels of business investment is vital to accelerate the growth trajectory of
the European economy. Much of the next four sections cover this issue
focussing on financing infrastructure and SMEs.
Figure 6: Investment has been weak across the EU [GFCF and
GVA 2002–2013]Rate of non-ﬁnancial business investment (GFCF/GVA) in EU
18
19
20
21
22
23
24
201320122011201020092008200720062005200420032002
EU (28 countries)
Source: Eurostat
The stock of bank lending to business is still contracting in aggregate
in the Euro area. Larger firms are accessing capital markets and bank
lending to support real estate is weak. However, while the pace of
contraction varies significantly between different countries, there is a
problem of access to finance for SMEs in some EU economies. This is why
we focus in Chapter 5 on how capital market financing can support firms
and in Chapter 6 upon how it is vital to diversify the sources of finance
for businesses.

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BBA
Figure 7: The stock of bank lending is contracting in the Euro area
[1997–2014, €bn]
1997 1999 2001 2003 2005 2007 2009 2011 2013
0
1,000
2,000
3,000
4,000
5,000
6,000
Euro area
Source: European Central Bank
Figure 8: The stock of lending is particularly contracting in some
member states [loans in France, Germany, Italy and Spain GDP
2003–2013, €bn]Loans in France, Germany, Italy and Spain to non-ﬁnancial corporations
0
200
400
600
800
1,000
1,200
2003 2005 2007 2009 2011 2013
Germany
France
Spain
Italy
Source: European Central Bank

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Euro crisis led to financial fragmentation
This recovery has been exacerbated by the Euro crisis, which has seen
an unravelling of the convergence in financial conditions across the Euro
area. Different economies have seen very different trajectories in their
recovery path.
Figure 9: Recovery paths have diverged within the EU
[France, Germany, Italy and Spain GDP 2005–2013]GDP (market prices, indexed 2005=100)
85
90
95
100
105
110
115
2005 2013201120092007
Germany
France
Spain
Italy
Source: Eurostat
Financial conditions in the periphery have begun to improve but have
not yet been reflected in lending spreads. As these economies are even
more dependent upon SMEs, this reinforces the need to diversify sources
of funding and increase the investment readiness of firms (see Chapter 6).

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BBA
Figure 10: Interest rates outside the core member states
are nearly 2% higher than inside [Lending over 5 years in
EU countries]Interest rates on new (over 5 year) leaning to non-ﬁnancial corporate business
Core EU countries
Non-core EU countries
2
3
4
5
6
7
2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Credit Suisse
1.2 Focus needs to shift to support growth
The policy response to the financial crisis has seen a combination of
macroeconomic measures (conventional and unconventional loosening
of monetary policy in conjunction with deficit-reduction programmes) and
a significant regulatory agenda designed to make the financial system
more resilient.
Much of this agenda is now being implemented. Reforms to make
banks safer include, enhancements to bank capital and liquidity, measures
to support bank recovery and resolution – ensuring orderly wind-down
and protection of depositors in the event of bank failure – and measures to
make markets safer. In addition, the banking union in the Euro area is being
introduced, to address the specific concerns about bank solvency and
European sovereign solvency.
With a newly elected EU Parliament and Commission being established,
now is the right time to refocus the EU policy agenda on growth and
jobs. This document sets out a range of ideas which we believe should
be considered to boost the growth of the European economy. These
measures will strengthen the financial system across Europe and ensure
it is deeper, more diverse and better equipped to support the needs
of businesses.
This implies a shift away from over-reliance on traditional overdrafts
and loans. An efficient financing market for businesses requires banks,

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suppliers of non-bank debt, equity providers and capital markets to work
together. It is important that as a business grows and develops it has the
appropriate range and mix of finance to support it. Short and long-term
funding solutions must operate effectively together as a continuum.
Our recommendations fall into a number of categories:
·· Measures to support infrastructure finance where there are clear market
failures in the provision of long-term finance
·· Measures to strengthen the export potential of European businesses by
removing some of the constraints to trade finance provision
·· Measures designed to develop more market based finance across
Europe, including kick-starting the EU securitisation market for ABS
(asset-backed securities)
·· Measures to support the financing of SMEs, including increasing the
diversity of funding sources and ensuring SMEs are “investment ready”
·· Measures designed to complete the reform of Europe’s financial market
infrastructure and maintain its competitiveness.

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There are market failures in the provision of long-term finance
for infrastructure particularly in sectors, such as energy and
transport. The EU has a significant role to play in promoting
trans‑national networks for transport, energy and digital.
Long-term financing to support infrastructure is a key part of promoting
European growth. Infrastructure supports the efficient working of
the economy but also has positive effects over and above its direct
contribution to the capital stock (promoting competition and the diffusion
of technology and ideas). Infrastructure spending as a share of GDP has
been declining across the last two decades (averaging 2.6% in the EU
since 1991). In many areas the capital stock is aging while total investment
in Europe has been falling over successive cycles.
In a number of areas, such as energy provision and digital, there would
be supra-national significant benefits from cross border investments to
enhance the single market across the EU.
Long-term project finance has been impacted by the crisis as Basel
rules require banks to match long-term assets with long-term liabilities.
Many have reduced or re-appraised their involvement in infrastructure
finance. There is recognition that more natural holders of infrastructure
assets are long-term institutional investors (pension funds and insurance
companies) who can use a portfolio of such assets to match long-
term liabilities.
The European Investment Bank (EIB) has played a central role in
financing infrastructure investment alongside commercial banks for years.
Chapter 2
Infrastructure financing

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This role has become more important since the crisis. This has led to
the development of the European Project Bond Initiative – a mechanism
to enable projects to access the capital markets and help institutional
investors to provide long-term infrastructure debt. It involves the use of
a first-loss tranche of debt or guarantee to credit-enhance projects. This
helps investors to participate in infrastructure projects by enhancing the
underlying credit of projects, particularly during the construction period.
The PBI (Project Bond Initiative) is still modest in its scale, being in its
pilot phase until the end of last year. Relative to the scale of the issue at
hand it is a drop in the ocean but is potentially an important piece of the
solution if leveraged up in sufficient size.
Project Bonds are a financing tool and not a funding mechanism.
Infrastructure can typically only be funded by user charges or general
government taxation. Barriers to institutional involvement remain: including
the sourcing of suitable opportunities, the long-term regulatory certainty
underpinning projects and constraints operating on the demand side such
as the capacity and expertise of the investor base.
We recommend:
Promote long-term infrastructure finance by increasing the size and
scale of European Investment Bank guarantees and ensure capital and
requirements for long-term investors do not unduly constrain activity.
1. The continued development of EIB facilities to support the project
bond program:
a. Increase the size of project bond programs and look to see how
they can be extended to countries of lower credit, for example in
southern Europe and Central European Economies
b. Ensure that where possible schemes are kept simple and easy
to access
c. Ensure that awareness of schemes is kept high
d. EIB should be clear on the product to be offered and not
offering both their long-term debt and project bond structure
to the same project.
2. Develop a register of national and European schemes to
support awareness.
3. Replicate successful schemes which promote confidence in long-
term investment.
4. Ensure capital requirements for insurers and pension funds do not
adversely affect the supply of long-term investment finance. Recent
Solvency II changes have been helpful.

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Chapter 3
Exporting for growth and supporting
supply chains
The ability of banks to support exporters is being hindered by
disproportionately strict rules on capital.
Exporting is a vital part of Europe’s growth strategy. We need a competitive
exporting environment that provides exporters with the best and most
flexible finance options. The recent Basel III and the Capital Requirements
Directive (CRD IV) changes have affected trade and export transactions
facilitated by banks in two key ways. They have:
·· Added to the capital and liquidity required to be held against
such assets
·· Made it more difficult to commit to transactions with term periods
beyond five years because of maturity matching requirements.
The BBA recognises the way in which the EU has sought to apply the
new regulatory framework, and that national Export Credit Agencies (ECAs)
have sought to bolster schemes to counter some of the effect. However,
there is still work to be done to avoid a reduction in the ability of banks to
support exporters.
It is particularly important that there is recognition in the capital
rules that trade finance transactions are self-liquidating and have over
time performed exceptionally well in terms of default; as work by the
International Chamber of Commerce (ICC) has demonstrated.
We very much welcome the Commission’s stated intent this year
to further review the role of ECAs and how better coordination and
co‑operation among existing national export schemes can be achieved.

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This should coincide with a further review of EIB support. The short-term
trade finance guarantee products introduced in June 2013 for certain
transactions and countries have performed well and benefited exporters,
but further improvements can and should be made.
We recommend:
Reduce capital weightings on trade finance assets recognising their strong
performance through the crisis.
1. Review the appropriate risk weightings for trade finance assets.
Defaults for export finance remain low. ECA assets are of high quality
and experienced no major increase in defaults even during the crisis.
This work should use the benchmarking being undertaken by the ICC
and its Global Risk Report. We strongly advocate a further reduction in
the capital weightings on such assets.
2. Ensure the leverage ratio does not adversely impede ECAs supporting
manufacture of capital goods.
3. Expand the EIB short-term trade guarantee schemes to include
midcaps and extend EIB guarantees beyond three years to counter
regulatory changes.
4. Evaluate the ability for ECAs working with the EIB to support European
supply chains. Work is under way in Italy on this and if successful
should be extended to other markets.
5. Central banks should consider how ECA supported credit could
be eligible under their refinancing windows. This would improve the
liquidity of export credits, affording greater flexibility in managing
bank balance sheets.

21
BBA
Chapter 4
Sources of finance for mid-sized businesses
Mid-sized businesses are too dependent upon bank loans and
overdrafts. Measures to diversify sources of finance for this
important segment of the economy should be promoted.
The finance landscape differs significantly between Europe and the US.
Non-bank financing is much more prevalent in the US whereas Europe is
still dependent upon bank financing to support growth. In the EU, bank
loans make up nearly 80% of total financing whereas the share in the US is
much closer to 50%. This is unlikely to change dramatically in the short-run
but it would benefit the EU economy to diversify sources of financing to
include more non-bank sources of funding. Here we look at how wholesale
markets can complement bank finance to better support business
financing, particularly for mid-sized businesses.

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Figure 12: Euro area businesses are much more dependent
on bank financing than in the US [Bank versus bond
financing US $bn]
United States Euro area
0
5,000
10,000
15,000
2011
2010
2009
2008
2007
2006
2005
0
5,000
10,000
15,000
2011
2010
2009
2008
2007
2006
2005
Non-ﬁnancial Business Loans
Total (US$bn)
Non-ﬁnancial Business Bonds
Corporate loans
Total (US$bn)
Corporate securities
Source: SP [2012] based on central banks, Eurostat, IMF and Bank for international
Settlements data [Breugel]
Ensuring wholesale capital markets work effectively to support the
non-financial economy and business growth is vital. Aligning regulations
to support this is critical. The banking sector is adapting to an evolving
regulatory framework. Basel III and CRDIV make financing longer term
investments – beyond 5 to 7 years – more challenging for banks.
While banks will continue to support SME financing needs through
origination and structuring of investments and by providing a core element
of financing through shorter maturity facilities, there is a need to unlock
capital markets for insurers and pension funds to work alongside banks to
meet long-term financing needs.
4.1 Direct lending by institutional investors
Direct lending to businesses is challenging for institutional investors
typically not equipped with the resources or expertise to perform the
due diligence process that lending to businesses requires. That is why
an important part of the forthcoming EU Parliament and Commission
activity will be to ensure regulatory proposals do not adversely impact
the supply of long-term investment finance by institutional investors and
pension funds.
Pension funds and insurance companies do lend directly to companies.
In the UK direct lending is estimated at 7% of the total outstanding stock of
business loans. Impediments include:
·· The guidelines under which fund managers operate and which restrict
their ability to invest in illiquid and or unrated asset classes.
·· Creation of a market infrastructure to facilitate standardisation and
trading of smaller issues – to create liquidity in the instruments.

23
BBA
Government and Government-sponsored agencies could help facilitate
market making in such bonds, though need to consider who enjoys the
benefit – the company or the investor.
·· Investor preference for packaged product and portfolio benefits as
individual loans and companies become smaller and smaller.
4.2 Mid-sized bond market
The Commission should continue to develop its thinking on how to
create an active bond market for mid-sized businesses. It will produce an
assessment of best practices on helping SMEs access capital markets
and this report deserves to be acted upon by policymakers alongside the
conclusions of the Commission-backed pan-European IPO Task Force
reporting later in 2014.
In doing so it is important to bear the following in mind:
·· Businesses can access the private placement market, a number of
mid-sized businesses successfully raise funds in this way. However,
most private placement investors are US-based with issues usually
dollar-denominated. Encouraging a larger and more active EU investor
base would introduce greater liquidity into this market.
·· To make the corporate bond market effective for SMEs and investors
it is likely some form of bundling is required. Securitisation models
and regulatory processes must be effective enough to support SME
corporate bonds.
Size and liquidity are the key issues in the development of capital
markets for smaller companies: The size of the sub-investment grade
liquidity pool is relatively low, so investors focus on bigger, more easily
understood companies. Investors seek liquidity which, in turn, means an
effective minimum size requirement (£125 million – £150 million per issue
in the UK) disqualifies many would-be issuers. Mark-to-market accounting
means bond holders fear the impact illiquidity will have on their ability to
manage their positions.
We recommend:
Ensure capital rules do not constrain direct lending, examine mechanisms
to develop a mid-sized bond market ensuring detailed elements of MiFID
do not constrain such growth.
1. Incentivise pension funds and insurance companies to allocate more
funds under management towards a broader range of asset classes.
2. Capital relief, such as under Solvency II, for insurance companies to
encourage long-term direct lending activity by non-banks.
3. Support measures to develop a mid-cap bond market by drawing on
the expertise of market specialists and work undertaken in this area
other markets focusing on ease of access, documentation, trading,
ratings and disclosure.

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4. The SME Growth Market category under MiFID should be supported
in the 2015 Prospectus Directive review, to make it easier for SMEs to
offer securities to a wider investor base at lower cost. Making it easier
and cheaper to invest in these markets will improve investor confidence
and the supply of equity. Consideration should also be given to
abolishing the requirement to produce a prospectus for certain issues.
5. Measures to boost the post-initial public offering (IPO) profile and
liquidity of quoted SMES to thereby reduce the cost of capital:
Flexibility should be applied to conflicts of interest requirements under
MiFID Article 16(3) in respect of investment research for issuers on
SME markets. Investors should not be dissuaded from investing in by
actual or perceived regulatory or conduct-of-business barriers.

25
BBA
As noted by the ECB European securitisation has been tarnished
and needs to be rebooted to make it easier for banks to lend
to SMEs.
Securitisation involves the transformation of loans on bank’s balance
sheets into bonds or securities that are then sold on to investors. These
bonds are backed by the cash flows from the underlying assets, which are
held in a company called a special purpose vehicle (SPV). Securitisation
gained a bad reputation as being responsible for the financial crisis but
this is to misunderstand the underlying cause. As a funding mechanism for
banks and a way of diversifying risk across the financial system it remains
a valid tool. Many European securitisations have performed very strongly
with underlying default rates way below corresponding assets in the US.
Chapter 5
Kick starting the EU ABS securitisation market

26BBA
Box 1: What is securitisation?
In a securitisation a bank sells assets, comprising
a pool of loans it has made to borrowers with
reasonably predictable cash flows, to another
company, a special purpose vehicle (SPV), set
up to acquire them. The SPV issues bonds to
investors, to fund the asset purchase. These
bonds are collateralised by the cash flows from
the underlying assets.
The risk associated with the underlying assets
is stratified by analysing historical default and loss
information. Each tranche has an expected probability
of default and loss, subject to the maturity profile
of that tranche. Some notes are more senior to
others with interest from underlying assets being
paid on these notes before they are paid on more
junior tranches.
This structure results in set of notes with different
credit risk and payment characteristics nested
within the overall securitisation instrument. Junior
notes protect more senior note holders if there is a
deterioration of the performance of the underlying
assets. More senior notes are bought by risk-averse
investors while junior loss-absorbing notes are either
placed with specialist investors able to assess and
price the risks or retained by the bank.
Securitisation allows banks to convert assets not
readily marketable – such as mortgages, credit card
debt or SME lending – into securities that can be
purchased by longer term investors. Securitisation
creates a capital market instrument to be bought and
sold in the secondary market, allowing investors to
realise their investment before maturity if need be.
Participants in a securitisation
The originator is the bank whose loans are being
securitised. Often corporates securitise assets too.
These underlying assets are sold to the issuer SPV
set up for the securitisation. The SPV holds the
underlying assets separately from other assets of the
originating bank so if the bank becomes insolvent
the impact on investors is minimised and cash flows
continue. Originators are required to retain 5% of the
Originator
(Bank)
Borrower
SPV
Investor
Bonds
Principal
and
interest
Cash
Mortgage
Sale
Purchase price
Entitlement to
principal and interest
Figure 15: A basic securitisation structure
Source: Association for Financial Markets in Europe

27
BBA
securitisation to ensure they, and not just investors,
carry risk. Underlying assets include mortgages,
credit card balances, car loans, consumer loans,
leasing receivables and other consumer and
business receivables.
Investors are owners of the notes who receive
regular coupon payments on the securitisation and at
maturity, if sufficient assets are in the pool, get back
their investment’s face value. Typical investors are
insurance companies or pension funds seeking to
match the duration of long-term liabilities with long-
term assets. Banks also invest in securitisations.
Investors’ interests are looked after by an
independent trustee who monitors the transaction to
ensure the issuer complies with the securitisation’s
terms, liaises with the manager of the underlying
collateral and oversees the management of cash flows
and assets to ensure investors are repaid, even in the
event of the insolvency of the originating bank.
The servicer and cash manager is responsible for
collecting the loan payments due on the underlying
loans and remitting them to the note holders. The
servicer is often the bank that originates the underlying
loans so the borrower maintains a direct relationship
with the bank. A swap provider – a highly rated bank
which provides interest rate or currency swaps to
eliminate mismatches between the underlying assets
and the notes – may also be used.
What happened in the crisis?
In the run-up to the financial crisis securitisation was
perceived to add to the stability of the financial system
by redistributing risk to a broader range of investors,
and away from bank balance sheets. But as the crisis
hit it became evident that banks were significant
investors in securitisations including those with US
sub-prime mortgages as underlying assets.
Some US sub-prime mortgages were originated
without regulatory oversight and without proper
assessment by the lender of the borrower’s ability
to continue to make mortgage payments. The lack
of basic credit judgment in extending loans was
partly because they were often sold straight into
securitisation vehicles and originators had no “skin in
the game”.
Investors did not exercise due diligence buying
securitisations, relying on credit rating agencies
for risk assessment. This over-reliance stemmed
from the increasing complexity of securitisation as
collateralised debt obligations (CDOs) and CDO2
were created in part to bundle the most risky junior
tranches of conventional securitisations for which
there were no natural buyers and to provide yield for
investors desperate for it in a low rate environment.
Rating agencies’ methodologies were undermined
as mortgages being originated were very different to
those their data models were based on. Investors,
without access to information on underlying assets,
lacked the ability to challenge what were overly
optimistic ratings.
Regulators too did not understand the complex
interconnectivity between the credit, liquidity
and counterparty risk arising from the expanded
securitisation markets and particularly its potential
impact on the overall stability of the financial system.
As interest rates in the US started to rise
underlying retail mortgage borrowers became
increasing stretched and defaults mounted This
amplified the negative feedback loop, causing
house prices to fall further. A rising default rate on
US sub-prime mortgage securities quickly spread
to the broader financial markets sparking the global
financial crisis. European securitisations, however,
performed well during the crisis, with only 0.95% of all
issuance defaulting compared with 7.7% for the US.
The problem was not securitisation in itself but poor
loan origination in the US by organisations and over-
reliance on credit ratings.
In the European market, the crisis was one of
liquidity rather than credit. “Leveraged” investment
vehicles bought global securitised assets and
financed themselves on a short term basis through
commercial paper or other secured notes. As credit
performance in the US deteriorated they were forced
to unwind positions, resulting in a deluge of paper
being sold into the market. This caused a significant
supply and demand imbalance and all but closed the
market. Over time these vehicles have been wound
down progressively.
Nonetheless the reputation of securitisation has
suffered. European securitisation has been tarnished
by association and there has been very little issuance
since the crisis abated, other than as a means to
access central bank funding.

28BBA
How does securitisation benefit the non-financial economy?
By investing in securitisations long-term investors can spread their
exposure to the non-financial economy by participating, indirectly, in loans
to homeowners and SMEs which, because of their diversificiation, are of
low risk.
For banks, securitisations contribute to a well-diversified funding base,
permit asset and liability matching and can provide an attractive funding
cost, which can be passed on to the borrower. By securitising, subject
to regulatory requirements, banks can recycle capital off of their balance
sheets thereby freeing up capital to facilitate new lending. Securitisation
benefits non-financial economy borrowers as banks’ on balance sheet
lending capacity is substantially increased. Banks’ balance sheet capacity
is by far the most important funding source for SMEs so it is important as
much as possible of it is freed up.
Banks may also themselves invest in securitisations which may
contribute, depending on regulatory agreement, to meeting their liquidity
requirements. Investment banks may also make a market in securitisation
bonds, contributing to market liquidity. When corporates securitise assets
directly it enables them to diversify their sources of funding, reducing their
reliance on banks as loan providers
Figure 13: The stock of European securitisations outstanding
is still falling [Asset-backed Securities, €bn]
0
500
1,000
1,500
2,000
2,500
2013201220112010200920082007
UK
Italy
Netherlands
Spain
Other

29
BBA
Figure 14: European securitisation issuance also remain very
weak [Asset-backed Securities, €bn]
Placed
Retained
0
200
400
600
800
1,000
20132012201120102009200820072006
Table 2: Yet European securitisation default rates are very low
[mid-2007–2013]
Original Issuance (€bn) Default Rate (%)
Europe
Total PCS eligible asset classes 960.2 0.15
Credit Cards 33.2 0.00
RMBS 756.0 0.12
Other consumer ABS 68.0 0.13
SMEs 103.0 0.41

30BBA
What changes have already been made?
A number of regulatory initiatives, designed to address shortcomings
identified during the crisis, have been introduced, including;
Retention principles The originator of securitised assets must hold
5% of the securitisation issue to ensure it retains
an economic interest in the performance of the
underlying assets.
Disclosure
requirements
Greater transparency and disclosure of the
ongoing performance of the underlying loan
assets have been introduced so investors
better understand the risk characteristics of
the exposures underlying the securitisation.
Capital requirements Proposed changes to the Basel capital regime
to require banks to hold more capital against
securitisations, achieving greater consistency
with the credit risk of the underlying assets.
They also seek to correct low risk weights,
reduce reliance on credit ratings and avoid
‘cliff’ effects following a ratings downgrade.
Liquidity requirements The Basel requirements provide for national
discretion to include RMBS (residential
mortgage-backed securities) in the Liquidity
Coverage ratio buffer but permit only a
relatively low recognition of their liquidity ‘value’
compared to other instruments with similar
risk characteristics.
Solvency II Solvency II requires insurers, which are
important non-bank investors in securitisations,
to adhere to risk management standards and
hold capital against their exposures, although
the proposed capital requirements are currently
too high, incentivising them to invest in other
instruments instead.
Most importantly, the leveraged investor base has disappeared since
the crisis as a result of economic and regulatory improvements which will
mitigate the potential for a liquidity crisis in future. The investor community
is now composed exclusively of “real money” investors, as well as banks,
which generally operate on a buy and hold basis. The challenge is to
grow the depth of this real money investor base. The industry is generally
supportive of these changes but considerable challenges remain to
restoring the viability of securitisation.

31
BBA
What still needs to be done?
A well-functioning securitisation market could enable banks to play their
part in financing growth by helping them to diversify funding sources and
free up capital for new lending.
We recommend:
Developing a single consistent definition for “qualifying securitisations” and
changes to the capital and liquidity treatment of those assets:
1. The capital changes proposed by Solvency II may discourage insurers
from investing in securitisations. Qualifying securitisations should be
treated less conservatively than currently proposed. The proposed
treatment for capital purposes between investments by insurers and
banks in securitisations is inconsistent – the same capital should be
held for the same risk.
2. Securitisations are only given limited value as assets eligible for banks’
liquidity management buffer. Including a wider range of securitisations
in the buffer would provide market liquidity. This will make
securitisations more attractive to insurance companies and pension
funds which want a vibrant two-way investment market.
3. The capital treatment of securitisations depends on how much an
originating bank is deemed by its supervisor to have transferred risk in
underlying assets from its balance sheet to that of the SPV. Different
European supervisors have different approaches to significant risk
transfer which may limit capital relief a bank can achieve and its ability
to redeploy freed-up capital in new lending. Basel is proposing rule
changes which may make securitisation more expensive for banks.
While these have been moderated, the absence of certainty casts a
shadow over the market.
4. A single consistent definition for a “qualifying securitisation” should be
developed and used for capital, liquidity and Solvency II purposes.
5. As a result of the credit downgrade of many banks since the start of
the crisis there is only a limited range of swap providers able to provide
the necessary smoothing of cash flows from the underlying assets
to match investor preferences. This could be alleviated were central
banks to guarantee counterparty exposures or alternatively act as the
swap counterparty.

32BBA
National policies should support SME access to a broad and
diverse range of financing options including alternative debt
finance as well as much greater support to develop equity
and growth finance.
6.1 Developing and expanding the sources of finance
Small and medium-sized enterprises are a vital part of the EU economy.
Across the EU they constitute two-thirds of employment and 60% of gross
value-added and investment. Their financing arrangements are heavily
dependent upon overdrafts and loans whereas alternate products, such as
asset finance, are not as extensively used and access to capital markets or
equity finance is much less developed than in other economies.
As we set out in the first section the bank lending channel has been
impaired post crisis as banks restructure their balance sheets and
respond to the new regulatory environment. Figures 7 and 8 show how the
outstanding stock of lending to the non-financial business sector continues
to fall across Europe with particularly steep falls in the periphery, at the
same time business investment and confidence have been much weaker.
The SME sector has been hit particularly hard due to the lack of
alternative financing mechanisms which larger firms enjoy. Section 4 looks
at some of the market solutions for medium-sized businesses, such as
direct investor lending or the development of a mid-sized company bond
market. For smaller and high growth firms in particular this increases the
Chapter 6
Financing of SMEs

33
BBA
urgency to ensure that alternative forms of financing are developed. This
section looks at these growing alternative sources.
To support stable growth, businesses must have access to “the right
finance at the right time”. Sources of finance should be diversified and
private sources of long-term capital mobilised. It must also be recognised
that there are huge variations in financing needs from micro-businesses
through to larger medium-sized companies and midcaps.
The BBA believes the role banks play in supporting financing will
evolve. Banks will remain the primary source of debt finance for SMEs. The
banking industry however will continue to develop its range of alternative
finance products for business. These include asset finance, invoice finance
and supplier finance. The banks will also seek to connect up the financial
landscape by working with other finance partners. These include peer-to-
peer lenders and “angel” investors.
6.1.1 Equity and growth capital
SMEs have historically relied heavily on bank-provided debt finance where
equity would have been more suitable. In recognition of this, UK banks
have taken steps to improve the provision of long-term growth capital
through the creation of the Business Growth Fund (BGF), funded by the
major banks. This type of fund could be replicated across Europe.
The BGF is an independently operated £2.5 billion equity fund financed
largely by the banks and focused on providing long-term, growth capital to
businesses with a turnover from £5 million to £100 million. The BGF was
established to provide non-controlling, long-term investment into growing
businesses in a space where private equity and venture capital have
historically not operated.
Public sector support for the use of growth capital, such as equity
finance, provided by angel investors and venture capital, will also be
essential to achieve scale. These are very important sources of funding for
early stage growing businesses and should be a target of EU policy. While
the volume of angel investments is increasing and has been stimulated in
a number of member states through public funding, angel investing is still
patchy across Europe.
Other growth capital models are proving successful: The Breakthrough
Programme run by Santander UK offers growth capital investment to fast-
growth SMEs in the form of a mezzanine loan. The funding is designed to
preserve cash-flow in the business – allowing it to focus on growth – while
not requiring any dilution of the owner’s shareholding. Money is advanced
in the form of debt, repayable at an agreed date (normally at the end of the
five-year investment period).
We recommend:
Measures to promote more angel investing across Europe, in addition
attempt to replicate programmes such as the Business Growth Fund and
the Santander Breakthrough programme could be replicated in other
member states.

34BBA
1. Seek to build a EU cross-border angel co‑investment fund.
2. COSME’s Equity Facility for Growth should focus on not just VC
funds but also angel investor activities.
3. COSME should also support regional or sector-specific
co-investment Funds.
4. Work with national Promotional banks to review how vehicles, such
as the BGF and Santander Breakthrough programmes, could be
replicated on a pan EU basis.
5. Develop a framework for businesses declined finance to be referred to
alternative sources of finance.
6.2 Promoting investment readiness amongst businesses
Many SMEs could benefit from education and engagement to
ensure they are better able to plan their financial affairs.
There are examples in various member states of programmes, many
initiated by the domestic banking industries, to support SMEs in their
understanding of investment readiness and finance options. In the UK,
the Better Business Finance (BBF) initiative is designed to help support
businesses to become “investment ready”. These involve the provision of
information, support and planning tools which ensure that business can be
helped to access the right type of finance at the right time for its purpose.
For example:
·· A Finance Finder tool that enables businesses to review their finance
options from a selection of over 500 finance providers.
·· Support tools to help with business planning, understanding credit
scores and lending principles.
·· An appeals service giving businesses the opportunity to have their
lending decision reviewed if they have been turned down for bank
finance. It also recommends alternative options of financial support.
This includes a letter from their bank detailing very clearly why the
application was declined. The SME can then use whatever appropriate
help is available for the specific reason for the decline.
In addition, the UK banking industry has developed a network of
mentors working with the business community known as Mentorsme,
set up to bring cohesion to the mentoring landscape and make it easy
for businesses to get mentoring support. It hosts over 150 mentoring
organisations giving businesses access to over 27,000 mentors, including
bank enterprise mentors working with businesses from multiple sectors to
support them in their finance and development needs.
Further work across Europe is needed to improve investment readiness
and help businesses recognise the benefits of long-term investment and of
instruments other than traditional debt.

35
BBA
We recommend:
The EU take a coordination role in promoting programmes designed to
help businesses become more “investment ready”:
1. To consider how programmes like the BBF initiative and similar
examples in Germany and Belgium could be provided in other
member states.
2. To continue outreach programmes – working with business groups
and finance providers to highlight finance options for business and
what businesses can access from European funded programmes in
the national market.
6.3 Role of EIB and EIF and promotional banks
EIB and EIF activities could be expanded and streamlined whilst
national promotional banks should be allowed the flexibility to
promote new forms of finance.
The EIB loan programmes have a number of strengths but could be
improved in some areas.
We recommend:
Expanding the reach, capacity and flexibility of EIB and EIF schemes:
1. Expand business reach, in its current format, the EIB scheme best
supports relatively mature SME businesses with the security to enable
access to EIB borrowing. It does not support start-up businesses, or
those lacking the required security.
2. Expand long-term borrowing capacity, accessibility to longer term
financing up to 25 years would be very beneficial. The EIB product best
supports customers with borrowing terms of less than 7 years but in
some key sectors longer term finance is necessary.
3. Create flexible time periods, structures and processes, furthermore
seeking amendment or variation to the scheme can be a lengthy
process and the EIB should work to shorten these or delegate certain
tasks to finance providers.
4. Complex agreements lead to lengthy negotiations and can delay the
ability to begin on-lending to businesses. A working group to review
how these can be further simplified would be beneficial.
5. Eligibility criteria can be vague and it would be useful to have explicit
guidance on the definition of eligible and ineligible projects.
6. The EIB’s involvement is a real selling point of the scheme but
awareness of the scheme is minimal. Building awareness would
increase customer demand.
There is much work currently underway in developing national
promotional banks and we would endorse efforts to simplify and streamline
the arrangements for approval of these programmes through State

36BBA
Aid tests. The State Aid risk management framework needs to ensure
it remains appropriate for market conditions and supportive of new
finance options.
One of the more important roles promotional banks can play is
co‑ordinating the communication and access to the variety of national
and European schemes for SMEs, as these can be confusing and
poorly promoted.
We recommend:
Promotional banks co-ordinate the communication of national and EU
schemes available to SMEs:
1. Seek to harmonise and simplify the range of schemes available. For
example, the linkages between COSME, Horizon 2020 and European
Structural and Investment Funds (ESIF) initiative. One potential solution
would be to create a register of schemes operating nationally and
across Europe to provide greater clarity.
2. Create a set of principles surrounding national promotional banks
that lays out best practice and ensures their ability to directly engage
with EIB and EIF programmes and in certain instance at as a channel
to deploy EIB and EIF schemes to smaller alternate finance players
who do not necessarily have direct ability or resource to access
EU programmes.

37
BBA
It is important to maintain a clear perspective on the inherent trade-
off between promoting growth and enhancing financial stability. In
particular there are elements of the regulatory reform agenda which need
to be coordinated where possible from a global perspective to avoid
unnecessary duplication and opportunities for regulatory arbitrage.
It would be a good idea to try and develop a framework through which
proposals could be “growth-proofed”. One example of how this could be
done would be to institute a much more robust framework for undertaking
impact assessment, one which had access to better financial sector and
business input to drive empirical estimation.
Our report published last year, Beyond Boundaries,
3
examined a
number of case studies through this lens to examine how reform was
progressing. It supports a coordinated global response to the regulatory
agenda. This section examines a number of areas where this principle
needs to be applied from an EU perspective including efforts to coordinate
reform globally and cautions against the unilateral imposition of measures
which will damage the competitiveness of the EU’s capital markets and
business. In particular:
·· TTIP – the transatlantic trade and investment partnership
·· Regulation of shadow banking
·· Proposed FTT
·· Bank structural reform
·· Banking union and the single market
Chapter 7
Maintaining the international competitiveness
of the EU’s capital markets
3
https://www.bba.org.
uk/news/reports/beyond-
boundaries-how-to-drive-
regulatory-coherence/

38BBA
·· Third country treatment in the EU
·· Subsidiarity, particularly in regulation of retail financial markets.
7.1 The Transatlantic Trade and Investment Partnership
The BBA advocates the inclusion of financial services within the TTIP
to improve regulatory coherence and deliver better outcomes for users
of financial services. TTIP should be used to establish a permanent
mechanism for:
·· Joint work to promote timely and consistent implementation of
international standards
·· Mutual consultation before new rules are proposed to avoid unintended
extra-territorial effects
·· Examining existing rules to assess whether they create new barriers
to trade
·· Basing assessments of the equivalence of rules on outcomes – opening
the way for mutual reliance on each other’s rules.
The Commission has recognised that TTIP is a golden opportunity to
address a key lesson of the crisis – the need to coordinate regulation that
governs global activities. Including financial services could make TTIP not
only an important element of the recovery from the crisis but also help
reduce the likelihood of new crises in the future.
7.2 Capital market and other market based funding
(shadow banking)
The regulatory environment must maintain flexibility to support a diverse
range of financing mechanisms. Having sources of finance outside the
banking system supports a more robust system and diversifies risk outside
the banking system.
The implementation of the FSB agenda across the EU should not
have unintended consequences which undermine choice, competition or
innovation in financing. For example, in the sphere of direct lending and
corporate bonds or in the area of Money Market Funds (MMF) – see box 2.

39
BBA
7.3 Financial Transaction Tax
We believe the FTT is fundamentally a tax on growth and a major risk to
Europe’s ability to recover from its current economic problems. On the
EU’s figures this tax would lead to a reduction in economic output at a time
when we should be focused on growth and jobs.
We do not oppose in principle the right of member states to implement
a tax on financial transactions. However, the current FTT design means
a large amount of transactions outside the 11 FTT-zone member states
will be captured, so there is extraterritorial reach affecting countries
choosing not to be part of this initiative. Concern about this extraterritorial
impact has been raised by groups from the USA, Japan and Australia,
amongst others.
There is a compelling case for the FTT to be substantially reconsidered.
7.4 Bank structural reform
With the UK Government having accepted the recommendations of the
Independent Commission on Banking back in 2011, and the primary
legislation completed last year, the UK is committed to implementing
structural reform in the form of Vickers’ ring-fencing. The subject of
structural reform is, however, still the subject of fundamental challenge by
continental European banks with many believing that it cuts across the
universal banking model and its ability to deliver customers a broad range
of services.
There is a belief that the case for some form of structural measure still
needs closer scrutiny and the incremental benefit proven once you take
into account measures such as CRD4 and BRRD. It also needs reviewing
in light of the potential effect on bank finance and European growth.
Box 2: Unintended consequences of regulation of Money Market
Funds and its impact on the non-financial economy
MMFs are an important cash management tool, a type of collective scheme that
invest in very short-term, high quality and highly diversified debt securities with the
objectives of principal preservation and liquidity while providing a market-based
rate of return. Already MMFs are subject to a higher degree of regulation and
oversight than other funds. In the EU, MMFs are governed by the AIFM and UCITS
Directives with additional rules imposed by ESMA, industry standards, such as the
IMMFA code of practices, and various rating agency criteria that collectively form a
robust framework.
Proposed reforms for some classes of MMFs involving the introduction of
a capital buffer would render these funds uneconomic. This could lead to risk
concentration of short term deposits held by corporate treasurers in larger banks.
Nevertheless, due to increased capital requirements on short term deposits, there
is also the potential that a large numbers of banks will withdraw from this market,
again further increasing the systemic risk in those banks remaining. It is critical
that there should be international coherence in the way in which MMF legislation
is developed and implemented.

40BBA
7.5 Capital markets union and the single market
The EU should complete the Single Market for wholesale financial services,
including the creation of a single supervisory culture and single rule book.
The ECB and EU policymakers are increasingly discussing a new idea,
summed up as a nascent capital markets union. Taken together with
Banking Union this may create in the longer term a “Twin Peaks” regulatory
structure in European financial services.
The ECB argued in its latest eurozone integration report that
“completion of the single market as regards integrated European
corporate bond and equities markets remains an important objective
for EU legislators, as this would contribute to the stability of the EU. This
integration of international capital markets is vital for the efficient allocation
of capital, which enhances economic growth and contributes to the
sharing of risk on an international, regional and sectoral level.” 4
A possible move towards capital markets union will first require
the completion of the single market in wholesale financial services by
implementing MiFIR and MiFID II. With these reforms representing a
wholesale shift in the way we supervise and engage with markets,
banks and clients, it is crucial policymakers and industry work together
to get the implementation right. It is the non-financial economy that will
ultimately bear the brunt of inappropriate or ambiguous regulations. Most
importantly, regulators must work together in drafting and implementing
these rules, for global markets require globally consistent solutions. The
move towards a banking union to complement Economic and Monetary
Union is an important (and welcome) development. It is very important that
this development complements rather than undermines the evolution of the
single market.5
7.6 Third country treatment
It is imperative EU financial markets remain open to attract third country
investment and remain competitive. For third-country investors, whether
via direct investment or portfolio flows, a mutually-recognised regulatory
framework is an important element of the EU’s attractiveness to third-
countries. The same applies to EU investors in other jurisdictions.
The work the G20 began in 2009 to coordinate the response
to the financial crisis and rebuild global financial market regulation
was an important signal that policy makers understood the need to
work cooperatively to deliver solutions. European participation in this
process has been welcomed and is a good base from which to build.
We encourage European policy makers to continue to work with
third countries to minimise unnecessary regulatory barriers. Ensuring
international coherence of regulation remains an important goal and will
help to make the region attractive to investors and businesses.
Europe must continue the work with relevant third countries to align
regulatory regimes as closely as possible. Ensuring international coherence
of regulation remains an important goal and will help to make the region
attractive to investors and businesses.
4
http://www.ecb.europa.
eu/pub/pdf/other/financial
integrationineurope201404
en.pdf
5
See BBA report Eurozone
Caucusing: A challenge
to the European single
financial market

41
BBA
7.7 Importance of subsidiarity
The BBA still questions whether the case for EU-wide legislation applied
to retail markets supports economic growth. Wholesale markets by their
nature are cross-border in that there are fewer participants and a need to
Box 3: The unintended extra-territorial effects of EU Legislation:
EMIR and central clearing
Derivatives are financial instruments that enable business to manage and
control risk. Whether employed to minimise exposure to currency movements
or protect against changes in interest rates, derivatives are vital tools for EU
businesses, especially those operating in overseas markets or trading with
non‑EU counterparties.
The European Markets Infrastructure Regulation implements the G20
commitment to introduce mandatory clearing and reporting of over-the-counter
derivatives across the EU. EU firms that use derivatives – no matter where they
are doing business – must clear their derivatives through an authorised central
counterparty (CCP). If that EU firm needs to clear its foreign derivatives through
a non-EU CCP however, such as if it were trading in India and Singapore, that
non-EU CCP must be ‘recognised’, and its home country also subject to positive
“equivalence” decision by the European Commission.
As of publication, the EC has failed to officially make an equivalence
decision in regards to any of the nine jurisdictions put to it for consideration. The
ramifications of this are considerable. If a non-EU jurisdiction is not yet deemed
equivalent, its CCP cannot be recognised. EU firms must thus withdraw from
clearing their trades through those CCPs, effectively withdrawing their derivatives
business from those markets.
Should two counterparties established in different jurisdictions enter into a
trade that is subject to a clearing obligation under their own respective rules, it
will not be possible for both parties to comply – a trade cannot be cleared twice
across two different jurisdictions. The most practical response will be that both
entities cease trading with each other.
Box 4: The unintended extra-territorial effects of EU Legislation:
EMIR and trade reporting
Under EMIR, all derivative transactions must be reported to an authorised trade
repository. These reports must be populated with detailed information specifying
the type of trade, value of the trade and the name of the counterparty, amongst
other requirements.
Where an EU counterparty trades with a non-EU counterparty, in order
to be compliant with EMIR, the EU entity must obtain information about that
counterparty in order for it to complete its own trade report. Where the laws of
the non-EU counterparty’s jurisdiction prevents the sharing of that information
however – such as in South Korea, where the sharing of such information with
a non-South Korean entity is severely restricted – the EU entity will be unable
to meet its EMIR reporting obligations without also breaking the law of that
foreign jurisdiction.
Asking firms to choose which law to break is untenable; in such instances,
firms are withdrawing from dealing with those entities completely.

42BBA
search for liquidity outside domestic markets. In contrast, retail markets are
less concentrated, characterised by consumers with a home-country bias
and subject to distinct cultural traditions and public policy choices.
Box 5: Principle of subsidiarity
Under the principle of subsidiarity, in areas which do not fall within its exclusive
competence, the Union shall act only if and in so far as the objectives of the
proposed action cannot be sufficiently achieved by the Member States, (…) but
can rather, by reason of the scale or effects of the proposed action, be better
achieved at Union level.
Consumer credit is a significant example of how the market for retail
banking services is essentially fragmented along the lines of societal,
political and legal differences in Member States. Domestic markets (such
as retail banking or wealth management) are structured to support client
bases whose banking needs vary greatly across the EU. It is therefore
crucial to properly assess whether cross-border retail legislation is fully
justified on the basis of the principle of subsidiarity. We also believe
that there are a broad range of tools available to the Commission –
legislation is not always the best course of action. In addition, all policy
changes should be supported by proper cost-benefit analysis as well as
a thorough impact assessment.

43
BBA
Recommendations for Financing European Growth
On infrastructure
1. Continue to develop EIB facilities to support the project bond program.
2. Increase the size of project bond programs and look to see how they
can be extended to countries of lower credit e.g. in southern Europe
and CEE.
3. Ensure that where possible schemes are kept simple and easy
to access.
4. Ensure that awareness of schemes is kept high.
5. EIB should be clear on the product to be offered and not offering both
their long-term debt and project bond structure to the same project.
6. Develop a register of national and European schemes to
support awareness.
7. Replicate successful schemes which promote confidence in long-
term investment.
8. Ensure capital requirements for insurers and pension funds do not
adversely affect the supply of long-term investment finance. Recent
Solvency II changes have been helpful.
On exports
9. Review the appropriate risk weightings for trade finance assets.
Defaults for export finance remain low. ECA assets are of high quality
and experienced no major increase in defaults even during the crisis.
This work should use the benchmarking being undertaken by the ICC
and its Global Risk Report. We strongly advocate a further reduction in
the capital weightings on such assets.
10. Ensure the leverage ratio does not adversely impede ECAs supporting
manufacture of capital goods.
11. Expand the EIB short-term trade guarantee schemes to include
midcaps and extend EIB guarantees beyond three years to counter
regulatory changes.
12. Evaluate the ability for ECAs working with the EIB to support EU supply
chains. Work is under way in Italy on this and if successful should be
extended to other markets.
13. Central banks should consider how ECA supported credit could
be eligible under their refinancing windows. This would improve the
liquidity of export credits, affording greater flexibility in managing bank
balance sheets.
On mid-sized business
14. Incentivise pension funds and insurance companies to allocate more
funds under management towards a broader range of asset classes.

44BBA
15. Capital relief under Solvency II, for insurance companies to encourage
long-term direct lending activity by non-banks.
16. Support measures to develop a mid-cap bond market by drawing on
the expertise of market specialists and work undertaken in this area
in the UK focusing on ease of access, documentation, trading, ratings
and disclosure.
17. The SME Growth Market category under MiFID should be supported
in the 2015 Prospectus Directive review, to make it easier for SMEs to
offer securities to a wider investor base at lower cost. Making it easier
and cheaper to invest in these markets will improve investor confidence
and the supply of equity. Consideration should also be given to
abolishing the requirement to produce a prospectus for certain issues.
18. Measures to boost the post-IPO profile and liquidity of quoted SMES
to thereby reduce the cost of capital. Flexibility should be applied to
conflicts of interest requirements under MiFID Article 16(3) in respect
of investment research for issuers on SME markets. Investors should
not be dissuaded from investing in by actual or perceived regulatory
or conduct-of-business barriers.
On kick-starting the EU ABS Securitisation market
19. The capital changes proposed by Solvency II may discourage insurers
from investing in securitisations. Qualifying securitisations should be
treated less conservatively than currently proposed. The proposed
treatment for capital purposes between investments by insurers and
banks in securitisations is inconsistent – the same capital should be
held for the same risk.
20. Securitisations are only given limited value as assets eligible for banks’
liquidity management buffer. Including a wider range of securitisations
in the buffer would provide market liquidity. This will make
securitisations more attractive to insurance companies and pension
funds which want a vibrant two-way investment market.
21. The capital treatment of securitisations depends on how much an
originating bank is deemed by its supervisor to have transferred risk in
underlying assets from its balance sheet to that of the SPV. Different
European supervisors have different approaches to significant risk
transfer which may limit capital relief a bank can achieve and its ability
to redeploy freed-up capital in new lending. Basel is proposing rule
changes which may make securitisation more expensive for banks.
While these have been moderated, the absence of certainty casts a
shadow over the market.
22. A single consistent definition for a “qualifying securitisation” should be
developed and used for capital, liquidity and Solvency II purposes.
23. As a result of the credit downgrade of many banks since the start of
the crisis there is only a limited range of swap providers able to provide
the necessary smoothing of cash flows from the underlying assets
to match investor preferences. This could be alleviated were central
banks to guarantee counterparty exposures or alternatively act as the
swap counterparty.

45
BBA
On SME financing
24. Seek to build an EU cross-border angel co-investment fund.
25. COSME’s Equity Facility for Growth should focus on not just VC funds
but also angel investor activities.
26. COSME should also support regional or sector-specific
co‑investment Funds.
27. Work with national promotion banks to review how vehicles such as the
BGF and Santander Breakthrough programmes could be replicated in
other member states.
28. Develop a framework for businesses declined finance to be referred to
alternative sources of finance.
29. To consider how programmes like the BBF initiative (which exist in
Germany and Belgium for example but not in all markets) could be
replicated in other member states.
30. Work with business groups and finance providers to highlight finance
options for business and what businesses can access from European
funded programmes in the national market.
31. Seek to harmonise and simplify the range of schemes available (for
example the linkages between COSME, Horizon 2020 and European
Structural and Investment Funds (ESIF) initiative). One potential solution
would be to create a register of schemes operating nationally and
across Europe to provide greater clarity.
32. Create a set of principles surrounding national promotional banks
that lays out best practice and ensures their ability to directly engage
with EIB and EIF programmes and in certain instance at as a channel
to deploy EIB and EIF schemes to smaller alternate finance players
who do not necessarily have direct ability or resource to access
EU programmes.
Competitiveness issues
33. The BBA advocates the inclusion of financial services within the TTP
to improve regulatory coherence and deliver better outcomes for users
of financial services.
34. The implementation of the FSB regulatory agenda around
shadow banking (market based finance) should avoid unintended
consequences which undermine a more diversified financing system.
35. The FTT is a tax on growth which would not achieve its stated
objectives. As proposed it has considerable extra-territorial reach
and should be reconsidered.
36. Reconsider the imposition of capital buffers for MMFs – instead use
liquidity fees and gates to address systemic risk.
37. Europe must continue the work with relevant third countries to align
regulatory regimes as closely as possible. Ensuring international
coherence of regulation remains an important goal and will help to
make the region attractive to investors and businesses.

46BBA
Glossary of useful terms
ABS (Asset-backed
Security)
A Security whose value and income payments
are derived from and collateralized (or “backed”)
by a specified pool of underlying assets, such
as mortgages or credit cards credits.
AIFM (Alternative
Investment Fund
Manager)
An Alternative Investment Fund Manager is an
entity that provides, at a minimum, portfolio
management and risk management services to
one or more alternative investment funds as its
regular business.
“Angel investors” or
“Business Angels”
Individuals prepared to invest in a start-up,
early-stage or developing firm.
Asset finance This is the use of balance sheet assets, such as
accounts receivable, short-term investments or
inventory, to obtain a loan or borrow money.
Bank recovery
and resolution
Set of measures to ensure the orderly
wind-down and protection of depositors
in the event of bank failure.
Banking union Political vision for more integration inside the
EU with the objective of strengthening and
extending the regulation of the banking sector.
Basel III (or the Third
Basel Accord)
Global and voluntary regulatory standard on
bank capital adequacy, stress testing and
market liquidity risk agreed by the members of
the Basel Committee on Banking Supervision in
2010–11 and scheduled to be introduced from
2013–2015.
Basel rules Set of rules issued by the Basel Committee on
Banking Supervision, initially focused on bank
capital adequacy and then extended to stress
testing and market liquidity risk.
Better Business
Finance (BBF)
An impartial information and business support
site that links businesses and entrepreneurs
with over 500 finance providers.
Business Growth Fund
(BGF)
Arising from the Business Finance Taskforce
and with 5 UK founding banks as its sole
shareholders, it invests equity in businesses
which are looking to grow, or have been
identified as having growth potential.
Capital markets These are financial markets for the buying
and selling of long-term debt or equity-
backed securities.

47
BBA
Capital Requirements
Directive (CRD IV)
These requirements, which came into effect
on 1 January 2014, introduced a supervisory
framework in the EU reflecting the Basel II and
Basel III rules on capital measurement and
capital standards.
Capital Stock The size of the equity position of a firm, which
can be found on the balance sheet (or notes) of
a typical financial statement, representing the
residual assets of the company that would be
due to stockholders after discharge of all senior
claims such as secured and unsecured debt.
Central Counterparty
(CCP)
An entity that acts as an intermediary between
trading counterparties and absorbs some of the
settlement risk. In practice, the seller will sell the
security to the central counterparty, which will
simultaneously sell it on to the buyer (and vice
versa). If one of the trading parties defaults, the
central counterparty absorbs the loss.
Central Counterparty
Clearing (CCC)
A process by which financial transactions in
equities are cleared by a single counterparty.
COSME A €2.3bn programme for the competitiveness
of EU SMEs.
Derivatives Special type of contract which derives its value
from the performance of an underlying entity.
This underlying entity can be an asset, index, or
interest rate, and is often called the “underlying”.
Equity markets Markets for trading equity instruments, which
are contracts that evidence a residual interest in
the assets of the companies after deducting all
their liabilities. Instruments are considered to be
equity instruments if, and only if, the instruments
include no contractual obligation.
European Commission Executive body of the EU that is responsible for
proposing legislation, implementing decisions,
treaties and day-to-day running of the EU.
European Investment
Bank (EIB)
Non-profit EU institution that makes loans,
and guarantees, and also provides technical
assistance and venture capital for business
projects that are expected to further EU
policy objectives.
European Market
Infrastructure
Regulation (EMIR)
Regulation that mainly consists of measures
to improve transparency and reduce the risks
associated with the derivatives market.

48BBA
European Parliament Legislature that, together with the Council of the
EU and the European Commission, exercises
the legislative function of the EU.
European Securities
and Markets Authority
(ESMA)
Legislative and regulatory authority to improve
the functioning of financial market in the EU by
enhancing investor protection and cooperation
between national competent authorities.
European Structural
and Investment
Funds (ESIF)
Financial tools set up by the EU to reduce
regional disparities in terms of income, wealth
and opportunities.
Export Credit Agency A public agency or entity that provides
government-backed loans, guarantees and
insurance to companies from their home
country seeking to do business overseas
in developing countries and emerging
markets that are considered too risky for
conventional financing.
Financial Crisis Situation in which the value of financial
institutions or assets drops rapidly.
Financial Transaction
Tax (FTT)
Levy applied to a specific type of monetary
transaction for a particular purpose.
Financial Stability
Board (FSB)
International body that monitors and
makes recommendations about the global
financial system.
Horizon 2020 Program from the EU for research and
innovation linked to financial instruments to
create new growth and jobs in Europe.
International Chamber
of Commerce (ICC)
Largest and most representative business
organization in the world whose main activities
are rule setting, dispute resolution, and
policy advocacy.
Institutional Money
Market Fund
Association (IMMFA)
Trade association representing the promoters of
triple-A rated money market funds and covers
nearly all major promoters of this type of fund
outside the USA.
Invoice Finance Situation where a third party agrees to buy
unpaid invoices for a fee.
Leverage ratio Any ratio used to calculate the financial leverage
of a company to get an idea of the company’s
methods of financing or to measure its ability to
meet financial obligations.

49
BBA
Markets in Financial
Instruments Regulation
Directive (MIFIR
MIFID II)
Directive and Regulation that aim to set up a
safer and more transparent financial system
by enhancing regulatory requirements, market
transparency and investor protection.
Mentoring
programmes
Programmes that consist of the transmission of
knowledge, social capital, and the psychosocial
support for business development.
Mezzanine finance Debt capital that gives the lender the rights to
convert to an ownership or equity interest in
the company if the loan is not paid back in time
and or in full.
Money Market Funds
(MMFs)
Funds that invest in short-term debt
securities and aim to provide investors with
a safe place to invest in easily accessible
cash‑equivalent assets characterised as
low‑risk, low-return investments.
Peer-to-peer lenders Method of raising debt that enables individuals
to borrow and lend money without the use of an
official financial institution as an intermediary.
Private placement Offering of securities by a company to an
individual or a small group of investors.
Risk and Capital
Weightings (or
Risk-based Capital
weightings)
Under Basel rules related to Capital
Requirements, Risk Weightings adjust the value
of assets for risk, simply by multiplying them by
a factor that reflects their risk.
Securitisation Process or practice of taking various types
of contractual debt to several investors.
The principal and interest on the debt,
underlying the security, is paid back to the
investors regularly.
Shadow banking Term that refers to unregulated or lightly
regulated financial entities that provide services
similar to traditional commercial banks.
Small and medium-
sized enterprises
(SMEs)
Non-subsidiary, independent firms which
employ less than a given number of employees,
or turnover threshold. This number varies
across countries and the most frequent upper
limit designating an SME is 250 employees, as
in the EU.
Solvency II Legislative programme from the EU that codifies
and harmonises insurance regulation. Primarily
this concerns the amount of capital that
insurance companies must hold to reduce the
risk of insolvency.

50BBA
Special Purpose
Vehicle (SPV)
Subsidiary company with an asset/liability
structure and legal status that makes its
obligations secure even if the parent company
goes bankrupt.
Supplier Finance Set of solutions that optimize cash flow by
allowing businesses to lengthen their payment
terms to their suppliers, while also providing the
opportunity to their suppliers to get paid early.
Trade repository Entity that centrally collects and maintains the
records of over-the-counter (OTC) derivatives.
TTIP (Transatlantic
Trade and Investment
Partnership)
Free trade agreement between the EU and the
United States for multilateral economic growth.
Undertakings for
Collective Investment in
Transferable Securities
Directives (UCITS)
Standardised and regulated type of asset
pooling, subject to harmonised EU rules and
typically devised for and marketed to retail
investors.

www.bba.org.uk
BBA
Pinners Hall
105 –108 Old Broad Street
London, EC2N 1EX
United Kingdom

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