Tuesday

18th Jun 2019

Interview

MEPs wary of small print in EU securitisation bill

  • Securitisation is the process of bundling loans, converting them into securities, and selling the risk (Photo: Cory Doctorow)

Can the revitalisation of a controversial financial tool, which, in the US, caused the subprime mortgage crisis in 2007, generate between €100 billion and €150 billion in additional funding for the European economy?

Paul Tang sighed.

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  • Tang: 'One of the reasons I came to the European Parliament was (...) to make sure that the financial sector works for everyone of us.” (Photo: European Parliament)

“It is a bit of a long shot,” he told EUobserver in his office in Brussels on Tuesday (26 January).

The Dutch economist and centre-left politician is in charge of steering two legislative proposals through the European Parliament, both of them aimed at revitalising Europe's securitisation market.

Securitisation is the process of bundling loans, converting them into securities, and then selling off the risk.

The European Commission is convinced that the EU market needs more securitisation and that this will generate the above-mentioned economic gain.

There are several conditions that need to be met before an increased use of securitisation can substantially help the economy, said Tang.

“First of all, securitisation has to be good. The condition is that we learn the lessons from the past. Then we have to revive it. [Only] then we can talk about the effects,” he noted.

“I am not at all convinced that this effect will be large. It depends very much on the steps we take.”

Nevertheless, the social democrat believes securitisation is not necessarily a bad thing.

“Securitisation is in itself a very old idea. It's also very simple: don't put your eggs in one basket,” he said.

For him, the more interesting part of securitisations is that they can help spread risks. The European economy, much more than the American, is very dependent on banks for financing.

“It has the advantage of freeing up capital in banks for which they can provide credit to for example SMEs. But also, because you transfer risks from banks [to] outside the banking sector, and to institutional investors, you reduce the systemic risk,” said Tang.

“What I like about securitisation is if it transfers risk outside the banking sector. That's good for banks. That's good for SMEs, and that's good for society.”

Economist Tang, a member of the EP since 2014, was an MP in the Dutch lower house from 2007 to 2010, handling the financial portfolio for the Labour party during the most intense years of the crisis.

Before that he had worked for a decade at the Dutch Bureau for Economic Policy Analysis.

“One of the reasons I came to the European Parliament was to learn from this financial crisis, to make sure that the financial sector works for everyone of us,” he said.

When the European Commission presented the securitisation proposal in September, it said it would be good for small- and medium-sized businesses (SMEs), because banks will be able to securitise SME loans. But Tang expects a limited effect on SMEs.

“You will have some securitisation of SME loans, no doubt about it, but the bulk of the market is securitisation of car loans and mortgages,” he said, adding that virtually all commission proposals are accompanied by the justification that they are “good for SMEs”.

Some have argued that that it is not SMEs, but in fact the banking sector that wants this proposal.

“I'm not sure that I have first-hand knowledge of that. It's my impression that there was indeed pressure from the banking sector. But I really don't know,” noted Tang.

Unusually, the European Council - representing national governments - had quickly reached a common position about the proposal, which needs support from both the Council and the Parliament.

Within the 10 weeks following the Commission's publication of the proposal, the Council published its preferred version, on which it will have to negotiate with Tang once the EP has voted its internal compromise.

But while governments have expressed their hope that the legislation will be adopted during the Dutch presidency of the council, Tang shattered those hopes.

Noting that it is a “technical and complex file”, the MEP said he wanted to make sure his colleagues understood the details.

“It can't be like the small print in a contract that is overlooked,” he said.

“We won't be done before the summer.”

EU endorses controversial finance tool

Commissioner Hill has announced he wants to revive the securitisation market, saying the practice has been "stigmatised" because of the 2008 US sub-prime crisis.

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