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Economic Analysis in Designing the Law on Security Rights

The more general observations in this and the next section on the role of economic analysis and overall attitude on security rights may offer useful background information for understanding policy choices behind the Finnish law on security over means of transport. Additionally, they may help to assess its readiness for reform.

In travaux preparatories for legislation on security rights, it is customary to discuss the anticipated economic effects in general terms. This discussion is, of course, based on general (however crude) economic analysis and assumptions of the functions of security rights. Availability of effective security rights, with a broad scope of assets eligible to be encumbered, is frequently noted to improve enterprises’ financing possibilities. For example, Government Proposal 190/1983 for legislation on the enterprise mortgage states as follows:[1]

Financing is a central factor in creating prerequisites for business activities. [...] Organising the debt financing needed is often hampered by the entrepreneur’s lack of assets eligible as security for credit. [...] The proposal aims at improving enterprises’ possibilities to use their own movable property as security for credit. This would diminish the need to resort to security rights provided by third parties. [.] The purpose of developing a mortgage system for movable property is to improve the conditions for conducting business in general, and particularly to facilitate financing arrangements of small and medium-sized enterprises.[2]

Another example is Government Proposal 133/2003 for the Act on Financial Collateral Arrangements, implementing the European Parliament and Council Directive 2002/47/EC on financial collateral arrangements:

Unification of legislation promotes functioning of the financial market within the European Union, and improves the stability of the financial system. This also contributes to enterprises’ chances to acquire financing from other Member States on more beneficial terms. [...] Regulation concerning security rights significantly affects the availability of credit and its price. [...] New types of security rights may make the functioning of the financial market more efficient, and increase the amount and liquidity of securities eligible as security for credit.[3]

To the author’s knowledge, no studies aiming to predict concrete (monetary or otherwise measurable) effects on the availability and price of credit have been presented or cited in travaux preparatories. The Government Proposal for the Act on Financial Collateral Arrangements even states as follows:

At this point it is impossible to make monetary assessment of the proposal’s effects on different parties’ direct costs, the volume of credit extension, or enterprises’ financing costs. Taxation essentially directs market practices. Also for this reason, it cannot be credibly assessed to what extent new types of security rights will become utilised. The price of credit is affected by so many other factors that the direct value of individual security clauses cannot be calculated.[4]

Expected distributional effects of security rights on insolvency have been analysed in travaux preparatories. A notable example of this is Government Proposal 181/1992 for legislation on reform of the priorities system.[5]

Use of actual empirical analysis appears to be relatively uncommon and limited as to its purposes. One example, however, is the Committee Report 1981:56, by the Committee on Enterprise Mortgage. On the basis of various public and private statistics, the Committee studied use of the then existing mortgage types for movable property and their significance in financing practice, also separating different business sectors. Informed by the empirical evidence gathered, the Committee ended up proposing broadening the possibilities to use movable property as security for credit.[6]

  • [1] All translations in this section are free and selective.
  • [2] HE 190/1983, Hallituksen esitys Eduskunnalle yrityskiinnityslainsaadannoksi [GovernmentProposal 190/1983], 1-2.
  • [3] HE 133/2003, Hallituksen esitys Eduskunnalle rahoitusvakuuslaiksi ja eraiksi siihen liittyviksilaeiksi [Government Proposal 133/2003], 15, 23-24.
  • [4] Ibid., 24.
  • [5] HE 181/1992, Hallituksen esitys Eduskunnalle etuoikeusjarjestelman uudistamista koskevaksilainsaadannoksi [Government Proposal 181/1992].
  • [6] KM 1981:56, Yrityskiinnitystoimikunnan mietinto [Committee Report 1981:56], 33-59. This ledto Government Proposal 190/1983, and finally to the Enterprise Mortgage Act (634/1984).
 
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