Europe needs to urgently overhaul rules holding back securitisation, a finance lobby group and former EU finance commissioner said, as fresh data shows the continent’s shrinking market for bundling loans contracted by a further 7 per cent last year.
The EU and UK are both considering reforms to the securitisation market, which was all but blacklisted by European policymakers after it was blamed for stoking the 2007-08 financial crisis by exaggerating the safety of products that packaged inherently risky loans.
In a joint appeal, the Association for Financial Markets in Europe and Lord Jonathan Hill said the continued penal treatment of securitisations by EU and UK financial regulators was starving the region of much-needed financing for their economies.
AFME highlighted the 6.7 per cent fall last year in the volume of outstanding securitisations in the EU and UK which, together with previous falls, means the combined market has shrunk by 12.5 per cent since 2014.
In contrast, the outstanding volume of US securitisations grew by 38.1 per cent from 2014 to 2021, the latest data available.
“It is 15 years since the great financial crash, yet it still seems to dominate our thinking,” Hill, who served as commissioner for financial stability, financial services and capital markets from 2014 to 2016, will tell a global securitisation conference in Barcelona next week, referring to Europe’s attitude to its use.
“The biggest risk we face today is lack of growth, but we pursue regulatory approaches that make growth more difficult,” Hill added, in remarks released on Tuesday.
“We need to be honest about the trade-offs involved and ask ourselves whether we have struck the right balance, particularly when our international competitors are striking that balance in a different, more growth-friendly place.”
EU leaders and lawmakers will be asked later this year to approve an amendment on securitisation that was added to the bloc’s omnibus financial services legislation, a package primarily designed to give legal status to the latest iteration of global banking rules.
The amendment, originally proposed by French MEP Gilles Boyer, is designed to make it easier for banks and insurers to invest in securitisations and to reduce costs. However, the finance industry is pushing for broader reform. The UK parliament, meanwhile, is also reviewing its securitisation rules.
AFME research to be presented at the conference also shows how small the EU and UK’s securitisation markets are relative to their economies. The EU issued securitisations equal to just 0.3 per cent of gross domestic product in 2022, AFME said, while the UK’s issuance was 0.9 per cent of GDP. The US’s was 1.4 per cent in 2022.
“Europe’s securitisation market remains depressed while other large global capital markets reap the economic rewards of this financing tool,” AFME chief executive Adam Farkas will tell the conference. “At a time when inflation continues to rise, monetary policy is tightening and capital becomes increasingly scarce, now is the time to address this gap.”
Europe’s financing needs are “unprecedented, especially in light of recent economic shocks and the green and digital transitions”, he will add. “Banks can help finance economic growth through freeing up their balance sheets to facilitate lending through securitisation. Securitisation is a fundamental bridge to channel liquidity from the capital markets to the real economy in both the EU and the UK.”
