Capital markets union: Council agrees its negotiating stance on securitisation
“These proposals aim to relaunch the securitisation market, by promoting simple, transparent and standardised securitisations.”
Pierre Gramegna, minister of finance of Luxembourg and president of the Council
On 2 December 2015, the Permanent Representatives Committee (Coreper) approved, on behalf of the Council, a negotiating stance on proposals aimed at facilitating the development of a securitisation market in Europe.
The agreement, brokered by the Luxembourg presidency, comes just nine weeks after the Commission made its proposal. It will enable the incoming presidency to start talks with the European Parliament as soon as possible in 2016.
“These proposals aim to relaunch the securitisation market, by promoting simple, transparent and standardised securitisations. The objective is to contribute to the financing of the economy and hence to the creation of jobs and growth,” said Pierre Gramegna, minister of finance of Luxembourg and president of the Council.
First building block
A framework for securitisation is the first major building block of the EU's plan, launched during 2015, to develop a fully functioning capital markets union by the end of 2019. Developing a securitisation market will help create new investment possibilities and provide an additional source of finance, particularly for SMEs and start-ups.
Securitisation is the process by which a lender - typically a bank - refinances a set of loans or assets, such as mortgages, automobile leases, consumer loans or credit card accounts, by converting them into securities. The repackaged loans are divided into different risk categories, tailored to the risk/reward appetite of investors.
An EU framework for securitisation would encourage integration of EU financial markets and by make it easier to lend to households and businesses.
Reforms after the crisis
Following the US subprime crisis of 2007-08, public authorities took steps to make securitisation transactions safer and simpler, and to ensure that incentives are in place to manage risk. As a result of these reforms, all securitisations in the EU are now strictly regulated. However, in contrast to the United States where markets have recovered, European securitisation markets have remained subdued. This despite the fact that EU securitisation markets withstood the crisis relatively well.
Simple, transparent and standardised products
Building on what has been put in place to address risk, the proposals are expected to help differentiate simple, transparent and standardised (STS) products. The concept of “simple, transparent and standardised” refers not to the underlying quality of the assets involved, but to the process by which the securitisation is structured.
The agreement reached by Coreper covers two draft regulations:
- one setting rules on securitisations and establishing criteria to define STS securitisation;
- the other amending regulation 575/2013 on bank capital requirements.
The first brings together rules that apply to all securitisations, including STS securitisation, that are currently scattered amongst different legal acts. It thus ensures consistency and convergence across sectors (such as banking, asset management and insurance), and streamlines and simplifies existing rules. It also establishes a general and cross-sector regime to define STS securitisation.
The text amending regulation 575/2013 sets out capital requirements for positions in securitisation. It provides for a more risk-sensitive regulatory treatment for STS securitisations.
The regulations require a qualified majority for adoption by the Council, in agreement with the European Parliament. (Legal basis: article 114 of the Treaty on the Functioning of the European Union.)
Coreper's agreement will be confirmed by the Council on 8 December 2015.