The European Commission has published long awaited proposals to boost the role banks play in the securitisations market to meet the EU’s critical funding needs.
The measures are meant to enable banks to free up capital held on their balance sheets and thereby encourage greater financing and investment across the EU.
They are part of a broader shake up of Europe’s capital markets that have received much attention from policymakers over recent years due to rising geopolitical tensions.
Simplified framework
In a press briefing, financial services commissioner Maria Luís Albuquerque outlined the ambitions of the proposals.
“These proposals will contribute to reviving the EU securitisation market by simplifying and enhancing our regulatory and prudential framework while preserving robust safeguards to ensure financial stability,” she said.
“This review can contribute to deepening our capital markets and financing the EU’s strategic priorities, in line with the Savings and Investments Union objectives.”
Broadly speaking the reforms are meant to ease prudential standards, reporting requirements and due diligence that applies to banks when they do securitisation.
Among other things, the update sheds light on how the commission thinks banks should calculate capital requirements in relation to securitisation deals.
It proposes that amendments be made to the capital requirements regulation which sets out how much capital lenders need to hold for their securitisation exposures.
The European Commission aims to allow banks to reduce the amount of capital they hold when they do securitisations of less risky loan portfolios.
These proposals will now be submitted to the European parliament and the council for their consideration and adoption.
LCR amendments
The European Commission also published and put out to consultation draft amendments to the liquidity coverage ratio.
This sets out the amount of liquid assets that a bank must hold to meet short term liquidity needs.
In a note industry body Prime Collateralised Securities welcomed the proposed amendments and said they should allow a greater range of securities to be held by banks to meet their short-term liquidity needs.
The publication of the LCR amendments surprised many experts who expected any measures to be announced at a later date.
However others have warned the proposals could have the unintended consequences of making securitisation more costly and complicated.
Adam Farkas, chief executive of the Association for Financial Markets in Europe, called the proposals “a step in the right direction”.
But he added: “It is crucial to avoid introducing any measures that may inadvertently undermine the core objective of the reform to stimulate both demand for securitisation — through a growing investor base — and supply.”
Concrete examples where Afme urged caution include changes to bank capital treatment that would unintentionally inflate capital charges beyond current levels under the current regime for banks in any role.
Farkas added: “As it is the first legislative initiative of the Savings and Investment Union strategy, it will be important that co-legislators take an evidence-based approach to the upcoming negotiations to help rebalance the financing structure of Europe’s heavily bank-based economy toward capital market.”
Capital markets union
The Savings and Investment Union represents the EU’s new plans for creating a capital markets union across the bloc.
EU citizens have around €34tn in private savings with around a third of these funds sitting in bank accounts, according to the European Insurance and Occupational Pensions Authority.
How the European Commission’s securitisation proposals might be used to channel such savings was an important topic of discussion at the Financial Times’ ABS Conference in Barcelona in June.
During one panel discussion Ian Bell, chief executive of industry body PCS, said that securitisation is the only real means to unlock funds that can help build a capital markets union.
This is due to the strong regulations the sector already has, the credit quality of available assets and banks’ experience of doing securitisation.