An agreement was reached: the EU opens the loan taps

The negotiators of the European Parliament and the Council representing the member states have reached an agreement on a reform aimed at reviving the EU’s stagnant securitization market. The goal is to release capital from banks for new loans and increase the supply of financing to companies and households.

Securitization means that the bank bundles, for example, mortgages, business loans or consumer loans into one package and sells them to investors as securities. When the loans are transferred to investors, the bank gets space on its balance sheet to grant new credits.

In the EU, securitization has remained a significantly smaller market than, for example, in the United States and China, although the Commission and the financial sector have for years considered it an important way to increase investments and growth financing in Europe.

Too tough requirements

The reputation of securitization suffered badly after the 2008 financial crisis. The background of the crisis was especially low-quality mortgages issued in the United States, which were packaged and sold to investors as complex securities.

Although European securitizations survived the crisis on average clearly better than US securitizations, regulation was also tightened strongly in Europe.

According to the financial industry, the problem has been that securitizations have been subject to high solvency requirements. In practice, the investor has had to tie up a lot of capital in relation to the risk, which has made the products less attractive. In addition, the reporting and administrative requirements have been heavy.

As a result, the European securitization market has remained clearly smaller than before the crisis, while the US market, for example, has grown.

What changes?

According to the agreement, the solvency treatment of securitizations will be eased, especially in the safest arrangements. The current fixed risk weights will be replaced by a model that takes into account the quality of the loans underlying the securitization more closely than before.

At the same time, supervision is centralized. The European securities market authority Esma will have a larger role in monitoring the market than at present, and the supervision of STS securitizations, i.e. simple, transparent and standardized arrangements, will be unified throughout the EU.

Extensive reporting obligations will remain for public securitizations, but a lighter reporting model will be created for private arrangements to reduce costs.

Implications for businesses

The goal of the Commission and the banking sector has been to get more room for maneuver in banks’ balance sheets without them needing to acquire new equity capital. If the market starts to grow, banks can sell part of their old loans to investors and use the freed-up capital to issue new business and housing loans.

According to supporters, this can increase the availability of financing for SMEs in particular. Critics, on the other hand, point out that securitization involves the risk that credits are transferred further away from the original lender, which can weaken the transparency of risks if the regulation is relaxed too much.

The agreement reached now still needs the official approval of the European Parliament and the member states before the new rules can come into force.