What a difference a financial crisis makes. Before 2007, the consensus in much of continental Europe was that financial markets were the gung-ho wild west without the scenery. When US subprime mortgage exposure revealed the dangers of packaging-up and reselling — or securitising — ever larger volumes of increasingly dodgy loans, that view appeared vindicated.

Six years later, however, something strange is happening. Financial markets, and innovative products such as asset-backed securities, are seen by eurozone policy makers as a way out of the region’s crisis.

Traditionally banks, not capital markets, provided credit to continental European business and commerce. Often they were closely integrated into local communities and politics. As a result, the region was particularly exposed when banks went missing in action during the crisis and slashed lending to businesses and households.

The effects were amplified in eurozone “periphery” economies by the fragmentation of Europe’s monetary union, which sucked further funding out of countries such as Spain or Italy. By the end of last year, outstanding bank loans to Spanish businesses had dropped by €240 billion, or a quarter, from the start of 2009, according to European Central Bank data.

The void created by weakened banks unable or unwilling to lend is already being filled by European corporate debt markets, which remain under-developed by US standards. In something of a gold rush, outstanding debt securities issued by non-financial companies grew at an annual rate of 14 per cent in December.

The stage seems set for a decisive shift away from a bank based to a markets-based continental European financial system. But there is a catch. Companies raising funds in capital markets have been predominately from “core” northern eurozone countries.

Life is bliss for German companies. Banks fall over themselves to offer cheap loans, and yields on German corporate bonds have tumbled. But in the eurozone “periphery” not only are bank interest rates much higher, but it is really only large companies such as Telecom Italia and Telefonica that can tap capital markets.

Hence official interest in securitisation as a way of getting credit flowing again in economic black spots, by packaging loans to small and medium-sized enterprises in the periphery and selling them to global investors.

Before the crisis, Europe had a nascent market for ABS products backed by SME loans. In 2006, for example, there were 34 issues worth a total a €46 billion, with Spain accounting for 15, according to Fitch data.

ABS then fell into regulatory disapproval, but attitudes are turning again. At the start of this year, global regulators gave the higher-profile residential mortgage-backed securities market the seal of re-approval by including some in products banks could consider “safe” when building up liquidity buffers.

Now it is the turn of corporate loans-backed ABS. Peter Praet, ECB executive board member, told an audience in London last week that the revival of the European ABS market was “essential for the provision of finance to the corporate sector” and singled out their potential role in helping SMEs.

SME loan-backed ABS have a good default record, and the ECB has launched initiatives to improve transparency. “The market would have no problem selling it. If the spread was right, this stuff would fly off the shelf, as investors are crying out for alternatives to UK and Dutch housing risk,” says Gareth Davies, head of European asset-backed securities research at JPMorgan.

So what’s stopping the market’s revival? Praet hinted the regulatory onslaught had gone too far. There are also problems standardising small business loans. Like any market there will be worries about liquidity until it is sufficiently large.

What could prove critical, however, is the role of the ECB itself. Contrary to the impression given by Praet, ABS backed by SME loans did not disappear entirely during the crisis — they simply went undercover.

As part of its efforts to prop up Europe’s banking system, the ECB accepted such ABS as collateral in its liquidity-providing operations. So instead of being distributed, the modest quantities of ABS backed by SME loans launched during the crisis years have been retained by banks to obtain vital ECB funding.

In a still fragile financial system, the ECB has, in effect, taken over the role not just of banks in providing funding to SMEs but that of the market as well. Post-crisis, Europe will inevitably become more capital market orientated, but the shift will take time.

— Financial Times