Securitisation returns to the EU’s agenda, accompanied by unrealistic hopes and underexplored risks

29 October 2024 - 00:01 h

Press Release

Amid calls for a securitisation’s revival, the European Commission has launched a consultation on its role in boosting European competitiveness. This financial technique, which was central to the 2008-09 financial crisis, is being reconsidered as a way to enhance bank lending and deepen capital markets. However, its capacity to increase lending to the real economy is limited, while the risks to financial stability remain significant.

Securitisation, a financial technique that played a significant role in the global financial crisis of 2008-09, is back at the forefront of EU policymakers’ discussions. Once a key factor in the buildup of systemic risk that led to the collapse of global markets, securitisation has re-emerged as the ‘great white hope’ to reboot the Capital Markets Union (CMU) and enhance European competitiveness. Proponents of securitisation argue that securitisation could free up capital on banks’ balance sheets and provide more lending capacity to the real economy. Both claims are doubtful.

Finance Watch’s latest position paper examines the limits of securitisation as a tool for driving European competitiveness. The primary goal of securitisation for banks is to reduce regulatory capital requirements by offloading assets from their balance sheet. Yet its impact on the real economy remains limited. Most securitisations do not raise fresh capital from investors. The majority are held by banks as collateral to obtain central bank liquidity and only 30% are placed on capital markets. Even when capital is released, banks have no obligation to redeploy it as credit and can simply use these funds for payouts to shareholders or other non-lending activities.

“It appears, unfortunately, that the discussion about reviving securitisation in the EU has been amplified well beyond its practical relevance. Short of moving towards a wholesale import of the US model for funding the housing market, it is difficult to see how securitisation, of all things, could bring about the long-awaited breakthrough for the CMU. There is no doubt that securitisation, as an instrument, has its practical applications. It is time, however, to have a realistic discussion about its true potential, and to recognise its limitations, especially in the European context.”

Christian M. Stiefmueller, Senior Research & Advocacy Advisor at Finance Watch

Proposals from policymakers to promote securitisation include the creation of securitisation platforms supported by public-sector guarantees, in a ‘carbon copy’ of the US model. This would once again put the European taxpayer at risk in order to ‘de-risk’ the banking sector. Moreover, promoting securitisation in the EU would lead to overlaps with well-functioning markets for covered bonds and would have detrimental consequences for the relationship banking model, in key areas such as consumer mortgages and SMEs. Finally, securitisation does nothing to address the glaring shortage of equity capital, arguably the Achilles heel of the CMU.

Proposed amendments to securitisation regulation would cause the EU to deviate even further from the internationally agreed standards set by the Basel Committee. Finance Watch warns against a regulatory ‘race to the bottom’ in the name of competitiveness. Relaxing prudential rules, raises serious concerns about financial stability, particularly in light of the post-crisis reforms aimed at mitigating securitisation risks. These measures were agreed and enacted through regulatory cooperation at the global level. They should be reviewed and amended in the same way.

Policymakers should not rely on securitisation as a shortcut to avoid confronting more difficult challenges. The underlying reasons for the lack of progress on the CMU are exactly the same reasons which impede development of the EU securitisation market itself. The EU’s long term competitiveness depends on deeper reforms to the financial system, such as harmonising company, insolvency, and tax laws, as well as improving market infrastructure and supervision. Though politically inconvenient, these are the reforms needed to build an integrated, well-functioning capital market that can genuinely support European competitiveness.

Relaunching securitisation has been recommended in the report from Christian Noyer, the report from Enrico Letta and the report from Mario Draghi as a means of strengthening the lending capacity of European banks, creating deeper capital markets, building the European savings and investments union and increasing the EU’s competitiveness. The Commission launched a consultation on the functioning of the EU securitisation framework on 9 October 2024.

Read the Position Paper

For further details on the underlying mechanics of securitisation read Finance Watch’s ‘Introduction to Securitisation: Structures, regulation and market for asset-backed securities in the EU’ position paper from 25 October 2024

About Finance Watch

Finance Watch is an independently funded public interest association dedicated to making finance work for the good of society. Its mission is to strengthen the voice of society in the reform of financial regulation by conducting advocacy and presenting public interest arguments to lawmakers and the public. Finance Watch’s members include consumer groups, housing associations, trade unions, NGOs, financial experts, academics and other civil society groups that collectively represent a large number of European citizens. Finance Watch’s founding principles state that finance is essential for society in bringing capital to productive use in a transparent and sustainable manner, but that the legitimate pursuit of private interests by the financial industry should not be conducted to the detriment of society.