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New rules to protect investors and EU economy from bad loans

26 October 2017, 22:41 CET
New rules to protect investors and EU economy from bad loans

Photo © sergign - Fotolia

(STRASBOURG) - The EU gave the final approval Thursday to new rules which mean packaged loans converted into securities will have to be made less complex and more transparent before selling them on to investors.

The European Parliament at its plenary was giving the green light to rules which mean that investors in packaged loans will be protected from bad loans and informed about risks, while less complex and transparent structures for such loans will be developed.

Paul Tang MEP, the lead for the new securitisation rules, said: "The question is, can a toxic product be turned into a medicine for the EU economy? I dare to say yes, but you have to take control of this medicine. We have tried to learn the lessons of the crisis by making issuers and investors clearly responsible for their actions. In future, no-one will be able to say that they didn't know what they were selling or buying."

Securitisation - a process of packaging together individual loans and other assets (mortgages, consumer loans or leasing contracts) to form tradable securities is an important source of funding, which enables banks to lend more to the real economy.

Harmonised rules for simple, transparent and standardised (STS) securitisation should help to protect investors, make markets more transparent and improve risk management, in order to prevent the resale of bad loans fuelling a financial meltdown. STS safeguards should also help to revive the practice of securitisation, in the EU which declined after the US sub-prime crisis in 2008.

Investing in securitised packages should be restricted, e.g. to professionals and retail investors with sufficient financial knowledge and the ability to take losses, say MEPs. After passing a suitability test, a retail investor with a portfolio of no more than €500,000 would be able to invest up to 10% of that portfolio but at least €10,000.

To make the market more transparent and avoid moral hazard, MEPs sought to ensure that the interests of securitisation participants converge. Under the new rules, financial institutions will have to retain an interest of not less than 5% in any packaged securities that they sell.

MEPs ensured that "re-securitisation" - the bundling of securities that are themselves bundles of assets - would be banned.

Moreover under the new rules, a securitised investment package would have to meet tougher criteria to qualify as an STS securitisation and only EU-based entities could issue them.

In a separate file, MEPs approved new rules on preferential capital treatment for STS securitisation, and a new hierarchy for risk calculation methods, including a differentiation between STS and non-STS. These rules aim to ensure a level playing field for securitisations in the EU, irrespective of their country of origin, while retaining financial stability as the overarching goal.

Following the Parliament's vote, the new rules will enter into force on the twentieth day following that of their publication in the EU Official Journal.

Further information, European Parliament

Adopted text will be available here (26.10.2017)

Procedure: STS Securitisation

Procedure: Prudential requirements (CRR)

At a glance: Common rules on securitisation and European framework for STS securitisation

At a glance: Prudential requirements for credit institutions and investment firms

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