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15th Nov 2019

MEPs back plan to 'revitalise' complex financial products

  • The EU wants banks to use a financial tool that helped to cause the subprime mortgage crisis in the US (Photo: EUobserver)

MEPs have approved, with some modifications, a European Commission's plan to stimulate the use a controversial financial tool that helped to cause the 2008 financial crisis in the United States.

The European Parliament's economic affairs committee decided on Thursday (8 December) to back the commission's proposal to "revitalise" the securitisation market - the repackaging of loans, mortgages, or other contractual debts, and then selling off the risk on those loans.

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The tools became so complex and ubiquitous before 2008 that an underlying housing bubble in the US was not detected, leading to the subprime mortgage crisis.

Since the crisis, financial institutions and investors have shied away from securitisation, although its popularity on financial markets has picked up again in recent years.

The commission said last year that the securitisation market needed to be “revitalised”, because selling off the risk to repackaged loans can free up capital on bank's balance sheets.

It argued that this kind of activity could make more money available to lend to small- and medium-sized businesses.

On Thursday, economic affairs MEPs rallied behind that assumption.

With 44 of 49 votes, the economic affairs committee adopted a compromise deal negotiated by rapporteur Paul Tang, a centre-left Dutch MEP. They also mandated Tang to negotiate with national governments.

In a press release published minutes after the vote, Tang wrote that the parliament's version of the bill contained more safeguards, more transparency, and tougher sanctions.

Tang has also proposed a public register, dubbed the European Securitisation Data Repository.

Despite the changes the parliament's committee adopted on Thursday, MEPs have not proposed a fundamental change to the central aim of the plan, which critics say will only serve the financial sector.

Five MEPs from the far left Gue/NGL group had proposed to reject the commission's proposal, because “securitisation will never be the solution to job creation or fostering sustainable growth, but rather will serve as a profit lever for financial institutions and to stimulate financial speculation”.

Their amendment was voted down.

Let's try

The commission proposed to introduce its own certificate for securitisations, and says this will generate between €100 billion and €150 billion in income. In an interview with EUobserver, MEP Tang earlier questioned that prediction.

Even Jonathan Hill, when he was still EU commissioner for capital markets union, said last year he was not sure the plan would work.

“The honest answer is: We'll only know when we take this proposal forward. … We'll only know if it's working if banks and others directly want to take it up”, Hill said.

'Safer alternatives exist'

At a conference about the public interest in financial legislation on Wednesday (7 December), several participants criticised the commission's plan to revitalise securitisations.

Fionn Travers-Smith, campaigner and researcher for non-profit group Move your money, held a presentation about the difficulty small- and medium-sized enterprises (SMEs) have in the United Kingdom to acquire loans.

But he did not believe the commission's premise that more securitisation would lead to capital being freed on balance sheets which would then be made available to SMEs.

Travers-Smith noted that securitisation “was absolutely core to the financial crisis in the first place” and that alternative, “safer” measures exist to provide capital to SMEs.

“Why we would go down the securitisation route is absolutely beyond me,” he told EUobserver, adding that he thinks the banking lobby is the driving force behind the bill.

Access to finance 'not a big worry'

Moreover, the SME argument is even undermined by the European Central Bank (ECB), who the commission has said has supported the plan.

In the ECB's most recent survey of SMEs in the eurozone, small businesses “continued to be less concerned about access to finance as an impediment compared with other factors related to their business activity”.

According to the survey, SMEs are much more worried about finding customers, competition, cost of production and labour, availability of skilled staff, and regulation.

Only 9 percent said access to finance is their biggest worry – down from 10 percent in the previous survey, which is conducted twice a year.

MEP Tang will now negotiate with national governments, which had reached a common position at comparatively lightning speed.

The commission had proposed the legislation in September 2015. The council, where member states meet, had already reached a common position less than 10 weeks later.

Interview

MEPs wary of small print in EU securitisation bill

Paul Tang, the Dutch economist and MEP shepherding through the EU's securitisation bill, casts doubt on claims the risky sector can bring EU states an extra €100 billion.

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.

EU public lacks voice on banking laws

The complexity of financial laws and lack of NGO resources means the “man in the street” has little say on EU banking regulation, the EU Commission has warned.

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