From 2008 crisis to economic revival: EU relaunches securitisation for the future

From the Strasbourg correspondent – In 2008, its abuse triggered the financial crisis; now, with the proper care, it can enable Europe to restart and finance what it needs to remain competitive and uphold its green, digital, and defence agendas. It is securitisation, the process that allows banks to sell their loans to third parties at a discount, thereby eliminating their balance sheet liabilities in exchange for liquidity. Liquidity that can be put back into circulation in the form of loans to businesses.

With thousands of billions of euros frozen in current accounts and savers unwilling to invest their money in risky assets, the European Commission has identified debt securitisation as the instrument to free up and raise capital. In a nutshell, banks can sell their liabilities: the loan granted, i.e. credit to be repaid, is converted into a debt security and sold on the markets to other parties (pension funds, insurance companies, other banks) who can buy, at a reduced price, the security and trade it. In the meantime, the credit institution disposes of the liabilities and acquires funds generated from the sale of the securities.

The transaction is not without risk, since there is, in any case, a starting creditor called upon to repay its loan, and a default by this one produces a domino effect. Precisely this securitisation tool caused to the Great Recession at the end of the first decade of the century. However, the von der Leyen team’s proposal to amend
the relevant EU regulation emphasises that the context has changed. At the time of the 2008 crisis, securitisation was not regulated, and after it was regulated, it was regulated too much.

Immediately after the bursting of the subprime mortgage bubble, “it was believed that stringent requirements were needed to restore the reputation of the securitisation market, which suffered from inadequate protections and a strong lack of investor confidence,” reads the document. “Now that adequate protections have been firmly embedded in the market organisation and securitisation is regaining investor confidence, a better balance between protections and growth opportunities needs to be found, both for investment and issuance.” Forward, then, with fewer rules to suit European needs.

The goal is just that: “Relaunch the securitisation market in the EU“, as confirmed by Financial Services Commissioner Maria Luís Albuquerque. The second von der Leyen Commission, therefore, aims to succeed where the Juncker Commission, eager for new securitisation in the EU, failed. Yes, she admits, it is indeed “an instrument that has caused problems in the financial markets in the past, specifically the crisis of 2008, but we must not confuse the instrument with its abuse,” she stressed at the press conference presentation. “Securitisation is a useful tool for generating additional financing,” she insists, and “we want to stimulate the use of securitisation without introducing excessive risks for the system.”

Hence, the widening of the net for operators already in Europe. Banks are already part of a European supervisory system, and investors who are already present and therefore already ‘known’ to the system will be subject to fewer controls. More generally, it is intended to reduce undue operating costs for issuers and investors, balancing them with adequate standards of transparency, investor protection and supervision.

What is intended—in the name of the competitiveness agenda all to be financed with fresh resources that are not there—is to ‘recalibrate’ the system made too heavy by rules that have so far disincentivised what remains in the eyes of the EU executive and Albuquerque a helpful tool to “contribute to deepening our capital markets and financing the EU’s strategic priorities.”