Securitisation

Securitisation refers to the situation in which banks and other credit institutions package loans into securities and then sell them to investors. It lets banks transfer the risk of some loans to other banks or long-term investors, such as insurance undertakings and asset managers. This allows banks to use the capital that was set aside to cover the risk in those loans to create and sell new loans.

If it is structured soundly securitisation is an important channel for diversifying funding within the economy. However, since securitisation products played a significant role in the US subprime mortgage crisis beginning in 2007, European securitisation markets have remained subdued. The slow recovery of these markets reflects concerns among investors and prudential supervisors about the risks associated with the securitisation process itself.

As such, as part of the Capital Markets Union initiative launched by the European Commission, two legislative measures were proposed to promote a safe and liquid market for securitisation. These are:

  • a regulation on securitisation that will apply to all securitisation products and include due diligence, risk retention and transparency rules together with a clear set of criteria to identify simple, transparent and standardised (STS securitisations), i.e. Regulation (EU) 2017/2402 of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation
  • an amendment to the regulation on capital requirements to make the capital treatment of securitisations for banks and investment firms more risk-sensitive and able to properly reflect the specific features of STS securitisations, i.e. Regulation (EU) 2017/2401 of 12 December 2017 amending Regulation (EU) 575/2013 on prudential requirements for credit institutions and investment firms

These proposals aim to re-establish a safe securitisation market in Europe by differentiating simple, transparent and standardised securitisation products from more opaque and complex ones.

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