Brussels is making a renewed push to relax rules on an asset class once blamed for poisoning the financial system as it seeks the elusive formula for unlocking credit to households and businesses.
Lord Hill, the EU’s financial services chief, will on Wednesday set out options to revive the bloc’s moribund securitisation market, including through softening capital and risk retention requirements introduced since US subprime loan crisis.
“We should look again at whether the ‘skin in the game’ rules work effectively for high-quality securitisations,” the EU commissioner told the Financial Times, referring to the requirement for originators to retain part of the loan risk. “Let me be clear, I have no intention to relax the core of these rules. But there may be elements where we can lighten the regulatory burden for investors.”
Securitisation, which involves slicing loans and selling them to investors as repackaged bond-like instruments, took a near fatal reputational hit after the 2008 crash after lurid details of reckless practices in the US mortgage market.
The resulting regulatory crackdown — spread through half a dozen complex EU directives — forces originators to retain part of the loan risk and requires banks and insurers to set aside more capital against such instruments.
Along with the European Central Bank and Bank of England, the European Commission has sought to develop a securitisation standard that certifies the process for parcelling up the loans. Some tweaks have also been made in technical rules to ease capital requirements.
As he announces his ideas to develop Europe’s capital markets union, Lord Hill will suggest radical additional measures that could form part of a legislative proposal this year.
Most appealing to industry will be steps to ease capital requirements for banks and insurers, as well as cutting red tape and legal liability when handling high-quality loan bundles.
“If the high-quality label guarantees that the securitisation has been done in a robust way, perhaps we can relax some of the disclosure and due diligence requirements,” Lord Hill said.
This would go some way to addressing industry concerns that tighter capital rules have suffocated the market, even as central bankers and regulators work to revive securitisation. Issuance in Europe amounted to €216bn in 2014, less than half the €594bn in 2007. Estimates suggest two in every three securitised instruments last year were retained by the originator.
Any proposal would take a couple of years to work through the EU system, meaning a commission regulation is unlikely to provide the quick-fix sought by the industry. Other rules at national level — including on what counts as a risk transfer — could be altered more rapidly.
There remain political obstacles to liberalisation of the securitisation regime, including in reducing the 5 per cent “skin in the game” originators are required to retain.
“I don’t want a return to the bad old days. But all securitisation has been tarnished with the same brush and not all securitisation presents the risks of dodgy subprimes,” Lord Hill said. “In Europe, pre crisis, only 2 per cent of securitisations were defaulting.”
Richard Hopkin of the Association of Financial Markets in Europe said: “High-level support from the EU for the revival of the European securitisation market is very welcome. But we continue to call for co-ordinated action by European policy makers to recognise the strong credit and price performance of European securitisation since the financial crisis.”
Get alerts on Financial & markets regulation when a new story is published