The EU Council and the European Parliament have reached a provisional political agreement to overhaul and simplify the EU Securitisation Framework as part of the broader Savings and Investments Union.
Securitisation involves pooling illiquid financial assets – i.e. mortgages, corporate loans or consumer credit – and turning them into tradable instruments for institutional investors. Although post-crisis regulations made the European market safer and more transparent, critics have argued that strict capital rules and high compliance costs kept the market in prolonged hibernation (dropping significantly from pre-crisis peaks). The reform package announced aims to free up bank capital to boost lending for households, small and medium-sized enterprises (SMEs) and infrastructure projects across the EU.
The agreed measures aim to support securitisation activity in the EU while safeguarding financial stability. A stronger securitisation market can help diversify funding sources, enhance risk-sharing, and support additional lending to households and businesses, including small and medium-sized enterprises.
The proposal includes targeted amendments and simplifies the Securitisation Regulation by reducing operational burdens and streamlining due diligence and transparency requirements. It also amends the Capital Requirements Regulation to make the prudential treatment of securitisations more risk sensitive.
The deal struck by the co-legislators is expected to have a marked effect on the EU’s securitisation market by:
- re-calibrating capital requirements on a risk sensitive basis for banks investing in securitisations. Low-risk securitisations will benefit from materially lower capital requirements, while higher requirements are maintained for riskier securitisation positions.
- introducing a new ‘resilient’ category of securitisations and strengthening the well-established simple, transparent and standardised (STS) label, as part of efforts to enhance risk sensitivity and maintain prudence. The combined effect of resilient and STS features will provide added incentives for safe market practices and enhance investor confidence.
- establishing EU-level supervision for the independent entities that verify STS-compliance (‘third-party verifiers’) and fostering convergence on supervisory standards and practices on STS in the EU.
- reducing administrative burdens compared to the current rules to reduce costs for investors.
- raising investment limits for institutional investors known as undertakings for collective investment in transferable securities,or UCITs,to stimulate market growth.
- bringing in targeted changes to the STS category of securitisations to support cross-border market integration, enable the participation of insurers and reinsurers in the synthetic securitisation market, and facilitate the use of securitisations to finance projects before they hit their operational phase.
The proposal now awaits technical finalisation and formal approval by both the Parliament and Council. Once adopted by the co-legislators, the amendments will be published in the Official Journal of the European Union and will enter into force immediately.
