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29th May 2017

Use of securitised financial products grows without EU help

  • Securitisation helped cause the 2008 financial crisis, but the EU says it is essentially a safe product that can help SMEs (Photo: Universiteitskrant Univers)

Securitisation, a controversial financial product which the EU wants to endorse, has become more popular in 2016, despite new EU rules not having been agreed yet.

According to new figures, the European financial services industry issued €237.6 billion in securitised product last year, the highest figure since 2012, putting into doubt the need for proposed EU legislation.

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Securitisation is the packaging of loans, mortgages, or other contractual debts into securities that can then be sold on the market, together with the risk attached to those debts. The complex financial tools helped bring about the 2008 financial crisis in the United States.

The European Commission wants to “revitalise” the securitisation market and release it from its “stigma”.

While the Commission has not set a specific target to achieve, its communication department usually speaks about getting securitisation back to the “pre-crisis average”.

But according to data released on Friday (27 January) by the Association for Financial Markets in Europe (AFME), a lobby group for the financial service sector, issuance of securitisation is now higher than pre-crisis average for three years in a row.

Securitisation in Europe

Nevertheless, the EU commission still wants to introduce criteria for a new class of securitisation, which will receive the label “simple, transparent and standardised”.

It proposed a legislative text in September 2015. The Council, where national governments meet, and the European Parliament have reached their respective views on the text and now need to negotiate a compromise.

The two sides have had one meeting so far, last week in Strasbourg, with the next two rounds of negotiations scheduled for 7 February and 7 March, according to an EU source.

The responsible EU commissioner, Valdis Dombrovskis, said on Thursday (26 January) that he is “counting on the European Parliament and Council to reach swift agreement” on the file.

“There is broad international consensus that straightforward securitisations have a positive role to play in a modern economy,” he said.

The idea is that more securitisation will lead to banks having more capital available to lend to small- and medium-sized enterprises (SMEs), but empirical evidence for that expectation is scarce.

Barclays Bank told the commission, ahead of the unveiling of the plan, “it is unlikely that identifying new investors through securitisation would create significant increased lending to the SME market.”

In an interview last month, lobby group AFME said securitisation may not solve all problems, but can help.

“It should not be banned or treated as toxic waste,” said Anna Bak, a manager at the securitisation division of AFME.

She also pointed out that looking at the creation of securities is not enough, they also need to be sold.

“The commission's securitisation proposal will be a success when we see a trend towards more securities being placed on the market in Europe,” Bak told EUobserver.

AFME's figures on Friday showed that in 2016 only 35 percent of created securities had been sold.

However, with €96.4 billion in securitised product placed on the market, it did reach the highest figure since 2008.

This article was updated on 27 January 2017, 17:49, to include the paragraph about scheduled negotiations

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.

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