After years of watching the European securitisation market stagnate, a growing chorus of senior figures in politics and banking is demanding a more radical loosening of the restrictions that were imposed in the wake of the global financial crisis a decade and a half ago.
In the past two months, those calling for reform have included German finance minister, Christian Lindner, who described the existing regime as “extremely restrictive” in an interview with German newspaper Boersen-Zeitung, and Lutz Diederichs, the head of BNP Paribas Deutschland, who told another German outlet, Handelsblatt, that it was time to stop “demonising” securitisation.
Lindner declined to specify what legislative action he would like to see, saying he was only trying to start a debate. But a paper sent to the European Commission in December, which sources say emanated from the German and French finance ministries, did make specific recommendations.
Titled "Reviving the EU securitisation market: Key priorities for the coming months", the private document, seen by IFR, urged the Commission to act swiftly to reduce the regulatory burden on securitisation and lay the groundwork for an even more radical review in its next term.
“Though EU securitisations were not part of the problem during the great financial crisis, the reputation of all securitisation got tarnished,” the paper argued. “The high hopes for a dynamic revival at the time when the EU agreed its new legal framework in 2017 have not materialised and almost 15 years after the great financial crisis, the EU securitisation market remains sluggish."
Many securitisation professionals agree, though they rarely speak out publicly, preferring to voice their concerns through consultation responses and via lobby groups such as the Association for Financial Markets in Europe.
Fit for purpose?
The intervention by the European Union’s two largest and most powerful economies comes amid a long-running review of the regulatory and prudential regimes for securitisation that has so far produced only limited proposals that have fallen well short of industry demands.
A well-functioning securitisation market was identified as a key building block for Capital Markets Union in the Commission’s 2015 action plan, which estimated that it could unlock more than €100bn of additional bank funding to the private sector.
Since then, despite the introduction in 2017 of the simple, transparent and standardised securitisation label, which reduces capital requirements for qualifying transactions, and its extension in 2021 to synthetic securitisations, the hoped-for revival remains elusive.
When the Commission published a report on the Securitisation Regulation in October, it declared the existing rules fit for purpose, claiming there was no need for major legislative change, only fine-tuning.
And in December, the European banking, insurance and securities watchdogs, collectively known as the European Supervisory Authorities, published a report on the prudential framework for securitisation, in which they recommended limited adjustments that disappointed AFME.
Nevertheless, the Franco-German paper claimed the regulatory and prudential reviews represented a “window of opportunity […] to address some of the issues affecting the EU securitisation market’s development”.
Further recalibration
In some areas, the two nations pushed for reforms going beyond those recommended by the ESAs. As regards the Capital Requirements Regulation for banks, they said the Commission could examine further recalibration of the risk weights, while in the prudential regime for insurers, Solvency II, they said consideration should be given to increasing alignment with the CRR and further segmentation of junior, mezzanine and senior tranches.
The ESAs had considered and rejected some of these options in their joint report in December, saying they would add complexity without necessarily producing any benefit.
For the longer term, the paper urged the Commission to start work on a comprehensive review of the securitisation rule book in order to be ready to move forward when its next term begins. This would include the promotion of more work at the level of the Basel Committee.
“Specific attention should be dedicated to further demonstrating and communicating the benefits of securitisation for the financing of the real economy,” the paper said.
But despite the renewed calls for reform, securitisation bankers, who feel their market has been repeatedly let down, are wary of getting their hopes up only to have them dashed once again.
“Call me sceptical, because I’ve seen this so many times,” said one senior ABS banker in London. “The net effect is very little improvement in our investor base.”
“Not bad, not bad,” said another, sarcastically. “They’ve said this a lot, and then they make it worse.”
Then, reflecting, he added: “But it’s better than them saying, ‘We want to make it worse'.”
