Continental Shift: The Securitization of Europe

A dramatic shift is underway in the structure of European finance. Breaking with the past, European companies are increasingly financing their operations through securities instead of bank loans. This transformation, along with the growing integration of Europe's capital markets, could create business and investment opportunities in Europe as attractive as those enjoyed in the United States over the last decade. These changes could also help head off the looming pension crises facing many European nations.

During the 1990s, the United States experienced what is known as the securitization of finance. Money markets, corporate bond markets, venture capital, and publicly traded equity substantially displaced bank deposits and loans as both savings vehicles and sources of corporate finance. In 1999, traditional bank loans to U.S. companies fell to barely 12 percent of GDP, while U.S. stock and bond markets each soared to values of more than 150 percent of GDP. Private savings and investment patterns shifted as well. Over the last decade, the share of American household assets held in bank deposits dropped by half, from 25 percent in 1990 to 12 percent today. Meanwhile, Americans nearly doubled the share of their savings held in mutual funds and individual stocks, from 22 percent in 1990 to more than 39 percent today.

This securitization movement helped drive the surge in the U.S. financial services industry during the 1990s. A similar trend is now emerging in Europe, along with similarly promising business opportunities.

SUPER MARKETS

Over the next decade, the 15 members of the European Union (EU), with their 375 million people and combined GDP of nearly $9 trillion, will likely be joined by a number of eastern European and Baltic states. This expanded European market would then total more than 500 million people -- nearly twice the U.S. population -- and enjoy a combined GDP close to or larger than America's $10 trillion output. Although European stock and bond markets are now only half the size of their American counterparts (measured as percentages of GDP), they could grow dramatically if the EU successfully integrates its capital markets.