Tuesday

18th Jun 2019

Markets wait for EU rules on securitised financial products

  • The stock exchange in Madrid. The EU wants to revitalise a financial product called securitisation, which involves cutting up and repackaging loans, and selling off the risks (Photo: European Parliament)

A new EU 'stamp of approval' to kickstart the use of a controversial financial tool was given for the first time last week - but the market has mostly been in a waiting mode as the adoption of technical rules for the new EU system has faced delays.

The controversial financial tool is called securitisation, and it involves cutting up loans, mortgages or other debts in multiple pieces and then selling off the risk.

Read and decide

Join EUobserver today

Support quality EU news

Get instant access to all articles — and 18 year's of archives. 30 days free trial.

... or join as a group

  • Anti-capitalist protesters in London in 2011. The EU has tweaked the rules on securitisation, which in the US helped spark the 2008 financial crisis (Photo: Seun Ismail)

Securitisation of subprime mortgages in the United States caused the 2007-2008 crisis, leaving the method to be tainted with a bad reputation.

While the European financial services industry issued some €813bn in securitisation at its peak in 2008, this dropped to its lowest point in a decade in 2013, at €177bn.

In 2015 the European Commission announced that it wanted to remove the "stigma" attached to securitisation and to revive Europe's securitisation market by creating a framework for trusted securitisation.

This resulted in legislation that laid down the framework for "simple, transparent and standardised" (STS) securitisation.

The commission thinks that if there was an increase in repackaging contractual loans and selling off the risk in a certificated manner, this would free up balance sheets.

It estimated that between €100bn and €150bn of additional credit would become available to the private sector - and that in particular small and medium-sized companies would benefit.

The STS regulation has applied since 1 January 2019, but it was only last Friday (22 March) that the European Securities and Markets Authority (Esma) received its first notification of a securitisation product which met the STS criteria.

This raises the question: has the commission overestimated the market demand for STS securitisation?

According to a commission source, who spoke on condition of anonymity, the demand is there.

"There is a lot of demand in the market from potential issuers, but the market is waiting from some key implementing rules to be adopted by the European Commission," he said.

It is very common in EU law that the European Parliament and the Council of the EU - representing national governments - adopt a general regulation, but that these co-legislators leave technical details to be adopted by the commission, through a law-making procedure called comitology.

While the STS regulation was approved by EU institutions in December 2017, the work on the technical standards proved to be more work than foreseen.

"The commission received a lot of comments through the consultation that we wanted to address," said the source.

"That is why it has taken a bit longer to produce these technical standards. We are working very hard to address all the comments," he stressed.

In hindsight it is easy to say that the entry into force of 1 January was perhaps too optimistic.

But according to the commission source comitology was the only way to establish the very detailed standards.

"We could not have had this level of detail in the regulation," he said.

"Some of these reporting templates are 300 pages long. It would have taken the co-legislators ten years to go through all the detailed templates. You need technical expertise," he added.

The contact stressed that there is nothing in the law that prevents the market to issue STS securities, but that most market parties prefer not to do so until the key rules are in place.

Under comitology, there is also a period of one, two, or three months during which MEPs are given a chance to veto the detailed rules. With EU elections scheduled for May 2019, it seems unlikely that the final detailed legislation is in place before autumn.

The party which had the honour of being the first to have a securitisation adopted in the Esma register has remained anonymous.

The London-based Association for Financial Markets in Europe (Afme) said in its quarterly report earlier this month that while more securitised products were being issued, they were often not being placed on the market.

"The delay in approval by the EU public authorities of key elements of the new securitisation framework is clearly a factor," it said.

Nevertheless, Afme reported that in 2018 European financial services issued €269bn - the highest volume since 2012.

Unclear goal

The commission said when presenting its proposal in 2015, that if "EU securitisation issuance was built up again to pre-crisis average, it would generate between €100-150bn in additional funding for the economy" - although not everyone believed the additional funding to be this high.

The commission had not defined what "pre-crisis average" meant - which makes the target vague because the average will change depending on which years you include.

When defining the "pre-crisis" years as the period 1996-2006, the average issuance of securities in Europe was €168bn. For 1996-2007, it was €203bn, and for 1996-2008 the average was €251bn.

One could therefore argue that the goal of reaching the pre-crisis average has already been achieved - the 2018 issuance figure was €269bn - even before the STS regulation had applied.

But securitisation had been increasing almost every year since 1996, so the average would be much higher if those early years were excluded - defining the pre-crisis years as 2004-2007, the target would be much higher: €475bn.

SMEs lack support in EU financial plan

The European Commission's plan for a capital markets union is said to be aimed at small and medium-sized enterprises, but many could end up being left out in the cold.

EU wants to fast-track the capital markets union

The European Commission says that Brexit and the loss of the City of London, the EU's main place for finance, is a reason to accelerate the integration of the bloc's financial markets.

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.

News in Brief

  1. New socialist group leader to push for Timmermans
  2. Romanian ex-PM frontrunner to head new liberal group
  3. France, Germany and Spain in fighter jet deal
  4. Tusk grilled in Poland over role as PM
  5. Italy is 'most credible' US partner in EU, says Salvini
  6. EU blames Sudan junta for killings and rapes
  7. Report: EU may suspend Turkey customs union talks
  8. Swiss stock exchange could lose EU access in July

Feature

Romania enlists priests to promote euro switchover plan

Romania is due to join the single currency in 2024 - despite currently only meeting one of the four criteria. Now the government in Bucharest is enlisting an unlikely ally to promote the euro to the public: the clergy.

Trump and Kurz: not best friends, after all

The visit of Austrian chancellor Sebastian Kurz to the White House on Wednesday showed that the current rift in transatlantic relations is deepening by the day.

Stakeholders' Highlights

  1. Nordic Council of MinistersNo evidence that social media are harmful to young people
  2. Nordic Council of MinistersCanada to host the joint Nordic cultural initiative 2021
  3. Vote for the EU Sutainable Energy AwardsCast your vote for your favourite EUSEW Award finalist. You choose the winner of 2019 Citizen’s Award.
  4. Nordic Council of MinistersEducation gets refugees into work
  5. Counter BalanceSign the petition to help reform the EU’s Bank
  6. UNICEFChild rights organisations encourage candidates for EU elections to become Child Rights Champions
  7. UNESDAUNESDA Outlines 2019-2024 Aspirations: Sustainability, Responsibility, Competitiveness
  8. Counter BalanceRecord citizens’ input to EU bank’s consultation calls on EIB to abandon fossil fuels
  9. International Partnership for Human RightsAnnual EU-Turkmenistan Human Rights Dialogue takes place in Ashgabat
  10. Nordic Council of MinistersNew campaign: spot, capture and share Traces of North
  11. Nordic Council of MinistersLeading Nordic candidates go head-to-head in EU election debate
  12. Nordic Council of MinistersNew Secretary General: Nordic co-operation must benefit everybody

Latest News

  1. EU urges Swiss to move on talks or face sanction
  2. Frontex transparency dispute goes to EU court
  3. Commission goes easy on scant national climate plans
  4. Macron and Mogherini decline to back US accusation on Iran
  5. EU summit must give effective answer on migration
  6. Spain's Garcia set to be next Socialist leader in parliament
  7. Erdogan mocks Macron amid EU sanctions threat
  8. The most dangerous pesticide you've never heard of

Stakeholders' Highlights

  1. Platform for Peace and JusticeMEP Kati Piri: “Our red line on Turkey has been crossed”
  2. UNICEF2018 deadliest year yet for children in Syria as war enters 9th year
  3. Nordic Council of MinistersNordic commitment to driving global gender equality
  4. International Partnership for Human RightsMeet your defender: Rasul Jafarov leading human rights defender from Azerbaijan
  5. UNICEFUNICEF Hosts MEPs in Jordan Ahead of Brussels Conference on the Future of Syria
  6. Nordic Council of MinistersNordic talks on parental leave at the UN
  7. International Partnership for Human RightsTrial of Chechen prisoner of conscience and human rights activist Oyub Titiev continues.
  8. Nordic Council of MinistersNordic food policy inspires India to be a sustainable superpower
  9. Nordic Council of MinistersMilestone for Nordic-Baltic e-ID
  10. Counter BalanceEU bank urged to free itself from fossil fuels and take climate leadership
  11. Intercultural Dialogue PlatformRoundtable: Muslim Heresy and the Politics of Human Rights, Dr. Matthew J. Nelson
  12. Platform for Peace and JusticeTurkey suffering from the lack of the rule of law

Stakeholders' Highlights

  1. UNESDASoft Drinks Europe welcomes Tim Brett as its new president
  2. Nordic Council of MinistersNordic ministers take the lead in combatting climate change
  3. Counter BalanceEuropean Parliament takes incoherent steps on climate in future EU investments
  4. International Partnership For Human RightsKyrgyz authorities have to immediately release human rights defender Azimjon Askarov
  5. Nordic Council of MinistersSeminar on disability and user involvement
  6. Nordic Council of MinistersInternational appetite for Nordic food policies
  7. Nordic Council of MinistersNew Nordic Innovation House in Hong Kong
  8. Nordic Council of MinistersNordic Region has chance to become world leader when it comes to start-ups
  9. Nordic Council of MinistersTheresa May: “We will not be turning our backs on the Nordic region”
  10. International Partnership for Human RightsOpen letter to Emmanuel Macron ahead of Uzbek president's visit
  11. International Partnership for Human RightsRaising key human rights concerns during visit of Turkmenistan's foreign minister
  12. Nordic Council of MinistersState of the Nordic Region presented in Brussels

Join EUobserver

Support quality EU news

Join us