Securitisation: improving the financing of the EU economy

One of the main building blocks of the capital markets union is the effort to revive the EU securitisation market in order to improve the financing of the EU economy. For that purpose, it includes two legislative proposals introducing new rules on securitization:

a regulation on simple, transparent and standardised (STS) securitisation
a regulation amending the capital requirements regulation

The Council and the European Parliament reached a political agreement on both proposals on 30 May 2017. The final version of the regulations will be adopted once the texts are finalised at a technical level.

The two regulations lay down common rules for all securitisations and constitute a framework for safe, simple, transparent, standardised and adequately supervised securitisation products and to help differentiate those from more complex and risky financial instruments.

The new rules will help investors evaluate the risks related to securitisation, both within and across products.

This should in turn help create new investment possibilities across the EU and provide an additional source of finance in the economy, particularly for small and medium-sized enterprises and start-ups.

The regulations are to be adopted under the ordinary legislative procedure, i.e. by both the Council and the European Parliament.

Why is securitisation regulation needed?

Securitisation is a process where a lender, such as a bank, re-packages the loans it holds (e.g. mortgages) into securities that can be sold to investors. The investors then receive returns generated by the underlying loans.

Diversifying funding sources, better risk management

Securitisation allows a bank to free up some of its capital (that would otherwise have been set aside for covering the risks of the loans it has sold) for further lending to the economy.

In addition, securitisation contributes to distributing risks across the financial sector as banks transfer some of them to other banks or other institutional investors (such as insurance companies).

Having sources of funding that are more diverse and less dependent on the banking sector contributes to the overall stability and resilience of the financial system. This is because the impact that potential problems in the banking sector may have on access to finance becomes less acute.

Providing additional funding source to SMEs

According to the European Commission, in 2014 the volume of securitisation in the EU has dropped by 42% compared to the average levels in the pre-crisis period (2001-2008).

Securitisation of loans is an important source of financing for small and medium-sized businesses.

The Commission's findings show that the amount of SME loan securitisation dropped from €77 billion in 2007 to €36 billion in 2014. In 2013 35% of SMEs did not get all of the financing they requested from their banks.

The estimates show that if the volume of EU securitisation reached its pre-crisis average, it would generate between €100-150 billion in additional funding.

Therefore securitisation, when soundly structured, can:

improve efficiency and stability of the financial system
provide investment opportunities
create benefits for businesses and citizens through less expensive and accessible loans

In the Council

30 May 2017: the Council and the European Parliament reached a political agreement on both proposals on the securitisation.

8 December 2015: the Council adopted its negotiating position on the proposals on securitisation. This allows the presidency of the Council to begin negotiations with the European Parliament on the final version of the proposals.

2 December 2015: the Committee of the Permanent Representatives of the Governments of the Member States to the European Union (Coreper) approved, on behalf of the Council, a negotiating mandate for the presidency of the Council on the securitisation package.

30 September 2015: the Council received the proposals for the two regulations. The Council's Working Party on Financial Services analysed the proposals with the aim of establishing the Council's position on them.

Securitisation regulations: key points

The regulation on simple, transparent and standardised (STS) securitisation establishes criteria for defining 'simple, transparent and standardised' securitisations. For example, a securitisation is considered 'simple' when it is created using the same type of loans, i.e. the package contains only residential mortgages, and no further securitisation is allowed, etc.

The criteria for securitisation to be 'transparent' and 'standardised' include a requirement for the issuers to provide clear documentation explaining the instrument's structure and sequence of payments.

The regulation also includes rules on due diligence, risk retention and transparency, which apply to all securitisations.

The Council agreed with the European Parliament to leave the risk retention requirement at 5%, in accordance with the international requirements. The risk retention refers to the interest in the securitisation that originators, sponsors or the original lenders of securitisations need to retain themselves. The requirement ensures that securitised products are not created solely for the purpose of distribution to investors.

The Council also agreed with the European Parliament to provide for the creation of a data repository for securitisation transactions.

The Council and the Parliament also agreed rules to avoid conflicts of interest: in the STS certification process, even if the third party is involved, liability for the compliance with the rules remains with originators, sponsors, original lenders and securitisation special purpose entities.

The agreed text also makes sure that tailor-made rules apply to asset-backed commercial paper programmes (often referred to as 'short-term securitisations'). Such securitisations often contain car loans, car and equipment leases.

The amended capital requirements regulation makes the capital treatment of securitisations for banks and investment firms more risk-sensitive and capable of properly reflecting the specific features of STS securitisations.

Next steps

The Council reached an agreement with the European Parliament on both draft legal acts on 30 May 2017.

The Council and the European Parliament will formally adopt the regulations at first reading after the texts have undergone technical finalisation.