Global Analysis from the European Perspective. Preparing for the world of tomorrow




How securities are fabricated causing the real estate bubble to grow

The European Commission has resorted to STS’s with which it intends to effectively cope with the financial crisis. Yet, on closer analysis STS’s are likely to spark off another crisis.

What’s the mechanism? Banks grant credits and then they sell them on the general market as securities. In this way they avoid having bad credits on their hands while these are foisted on other entities. What do the banks do with the financial means they earn in this way? Well, they turn them into more credits and so the bubble becomes larger and larger. The securities created from the sale of credits are referred to as securitization; their American counterparts were the root cause of the 2008 financial crisis. Still, the European Commission wishes to make use of securitization, only this time is is supposed to be safe, simple, transparent, standardized; hence the abbreviation STS. The Commission says they will make it easier for small and medium businesses to gain financial resources and simultaneously will reduce the systemic risk (like bad credit). The risk, however, is only transferred from banks to other financial institutions. This will make it more difficult the supervisory institutions to fulfil their duties, since such securities are not open to the public nor is it easy to gather information which of the financial entities is running up excessive debt. It may turn out that the said transparency will only remain in words.

What about standardization? Banks will be capable of converting the financial instruments created from BBB securities into AAA ones, which are attractive to investors since this process is neither supervised by financial supervisory authorities nor are they rated by independent agencies but by the banks themselves. That’s how simple it is. In this way banks make their finances look much better: “bad” credits are not in the books any more. Still, they do not disappear. Since the requirements regarding one’s own capital in order to be granted an STS will also be lowered, then it may happen that such credits will not be made good. What’s more, the economic circumstances in Europe under which STS’s might be introduced are not particularly favourable: wages are cut, especially in Southern Europe (Greece), but also in Ireland; the ECB pushes up inflation i.e. the prices will slowly and inevitably grow. How much will those financial instruments b