The European Commission has suggested changes to EU debt securitisation regulations established after the 2008 financial crisis, aiming to unlock bank capital and boost lending.
On Tuesday, the commission introduced plans to lower capital costs for banks that hold securitised assets and simplify requirements for investors and issuers. These initiatives are part of a larger effort by Brussels to unify the EU’s capital markets, which is vital for enhancing the continent’s economic competitiveness.
The push for revising the community’s prudential framework, perceived by many as overly strict, follows last year’s calls from Mario Draghi, the former Italian Prime Minister and European Central Bank president, as well as a directive from EU leaders to “revitalize the European securitisation market through regulatory adjustments, utilizing available flexibility.”
Investors have also pressed for market reforms, arguing that packaging corporate debt, car loans, and mortgages into securities could unlock hundreds of billions of euros in financing for the EU economy.
Maria Luís Albuquerque, the EU’s financial services commissioner, remarked: “These proposals today will help rejuvenate the EU securitisation market by simplifying our regulatory framework while maintaining strong safeguards for financial stability.”
“I fully expect banks to leverage this suitable framework to increase funding for households and businesses.”
A key aspect of the proposals includes a reduction in minimum risk weights, representing the capital banks must hold against potential losses, for various types of securitised assets, especially high-quality tranches that comply with the EU’s “simple, transparent and standardised” (STS) criteria.
Currently, senior positions in STS securitisations face a minimum risk weight of 10%. The commission aims to lower this to 5%, and for senior non-STS tranches, the minimum would decrease from 15% to between 10% and 12%.
Another significant change involves the formula used to calculate banks’ capital requirements for securitisation exposures under current EU regulations, known as the p factor.
Critics have long argued that this formula excessively inflates capital requirements for specific types of securitised assets. The new proposal intends to address this by lowering the p factor for senior STS tranches from 0.5 to 0.3, and for senior non-STS tranches from 1.0 to 0.6, equating to a 40% reduction.
Adam Farkas, CEO of the Association for Financial Markets in Europe, expressed optimism, stating that the commission’s suggestions acknowledge the insufficient risk sensitivity of the current capital framework.
Further proposals regarding insurers’ capital charges, which many in the industry believe have also hindered demand for securitised debt, are expected in late July.
Nonetheless, some critics argue that these proposals threaten financial stability and international standards established to prevent another global financial crisis.
“What they are proposing effectively breaches Basel standards,” stated Julia Symon, head of research at the non-profit Finance Watch. “The Basel accord was the only existing standard and was already a compromise; now we are set to weaken it.”
However, EU officials defended the initiatives.
“Our approach introduces a level of risk sensitivity to a very conservative standard currently in place. It aligns with the spirit and logic of the Basel standard,” remarked one official.
Brussels’ proposed adjustments to the securitisation framework also aim to relax due diligence requirements for institutional investors, particularly when third-party due diligence has already been completed by the issuer.
“Disclosure and transparency rules have become overly burdensome,” remarked another EU official, maintaining that the changes should prevent unnecessary costs for issuers.
The reforms would also streamline reporting formats for issuers, aligning them more closely with existing guidelines from the ECB. The commission suggests allowing private securitisations—those not publicly listed—to report less detailed information, while public transactions would be subject to higher transparency requirements.
Jillien Flores, head of advocacy at the Managed Funds Association, representing one-third of global hedge fund assets, stated: “Simplifying these requirements will cut unnecessary costs, encourage market participation, and help attract more global capital into EU securitisation markets.”
The commission’s recommendations follow years of feedback from market participants indicating that Europe’s securitisation regulations are too heavy and conservative compared to markets like the U.S., where securitisation plays a significantly larger funding role.
Before the financial crisis, the EU’s securitisation market was 87% the size of the U.S. market, but it has since shrunk to only 17%, according to asset manager PGIM.
Taggart Davis, head of government affairs for Europe at PGIM, commented: “While we must remember the lessons learned from the financial crisis, we should also trust that we have gained insight from those experiences and can create a regulatory framework that incorporates these lessons without hindering market growth.”
The proposals will need to gain support from a majority of EU countries and pass through the European Parliament, a process that may take several months.
