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As early as 2013 the European Central Bank (ECB) was effusive not only about securitisation’s ability to spread risks, but also about its ability to channel funding to the economy, including small and medium-sized enterprises (SMEs). The ECB and the Bank of England even published a rare joint paper in 2014 making the case for a “better-functioning securitisation market in the EU”.
This aim then became one of the main planks of the European Commission’s “capital-markets union” initiative—an attempt to shift Europe away from overreliance on banks. A legislative proposal put forward by the commission in the autumn of 2015 sought to smooth the way for securitisation by setting up common rules and establishing a special category of “simple, transparent, and standardised” securitisations with fewer regulatory requirements. This law is still in the throes of the EU legislative process, but is nearing the end.
Securitising assets to sell bonds on to investors is not an attractive source of funds for most banks. The ECB is simply so much cheaper. At best, banks are using the technique to offload specific risks or types of assets, such as non-performing loans. Matthew Jones, head of European structured finance at S&P Global, a ratings agency, says that the majority of securities on the placed market come from non-bank lenders or private-equity-backed deals.
Even the new proposal, rather than encouraging securitisation, may have the opposite effect. The European Parliament has made a number of amendments to strengthen it, including one that would raise the risk-retention requirement to 10% or even 20%—which investors argue would stifle the market. Others would determine that only EU-based entities are eligible to invest in the securities, and impose various onerous disclosure requirements.
If securitisation looks unappealing, investors do have murkier options. There has been an increase in the number of bilateral deals, including sales of (unsecuritised) loan portfolios. “Synthetic” securitisations, where derivatives are used to transfer risks, are also gaining in popularity.