Calls for reform intensify as industry pushes to fuel growth and fund Europe's green transition

The European securitisation market is “far too small and illiquid,” according to a recent report from True Sale International (TSI) and the Association of German Banks (BdB). The scale of the challenges could be having a negative impact on vital innovation across the continent’s economy.

The report, titled ‘A strong, competitive Europe: unlocking the potential of securitisation’, underscores the regulatory barriers that have stifled the market’s growth. It cites “excessive” regulations that have led to high transaction costs for both investors and originators, preventing securitisation from reaching its full potential – including funding the green and digital transitions. 

These challenges are not new. The report reflects feelings shared widely across the industry regarding the hindrance of government and regulatory restrictions, which were flagged at the recent S&P European Structured Finance conference last week (SCI 13 September).

The German study, presented to the German Federal Ministry of Finance on Monday, has reportedly been well received, aligning with several proposals presented earlier this year by the Noyer Group, Paris EuroPlace and of course AFME who recently published a five-point plan to revive the European securitisation market (SCI 6 June).

“We have focussed on the EU Securitisation Regulation itself, on the CRR and Solvency II,” Jan-Peter Hülbert, md of TSI and co-author of the report, tells SCI. “Our proposals are concrete and shall enable the legislator to make the necessary amendments to make the necessary adjustments to the regulation.”

Despite being discredited – unjustly, as many industry insiders would say – during the GFC, the European securitisation market is yet to recover from such reputational damages. Indeed, AFME’s Securitisation Data Snapshot for 2022 highlighted the severity of Europe’s stagnation – as it reported that for 2022 total European securitisation issuance stood to be less than 10% of the size of the US, versus a recorded 85% in 2008. 

Additionally, although its transactions have consistently lower default rates than its US counterparts, Europe’s regulation has led to disproportionately higher capital requirements and more complex issuance processes. 

The fundamental challenge is the high transaction costs associated with European regulation, as stringent reporting and due diligence requirements drive up the prices for originators and therefore the investors too. These market characteristics have historically not only deterred investors and originators, but driven them towards less costly alternatives such as covered bonds and corporate debt. 

Indeed, the first appeal of the report is a need for a U-turn from the Basel Committee on Banking Supervision on its approach to capital requirements calculations.

“Securitisation is a very important financing tool, connecting credit lending from banks to the real economy with capital markets,” explains Hülbert. “This is particularly important for the EU, with broad SME sectors and less developed capital markets.”

The path forward, according to TSI and BdB, lies in streamlining the securitisation process. Key recommendations from the report include lowering capital requirements for low-risk tranches and simplifying risk retention rules (the aforementioned suggested amendments to the Basel framework) – particularly for transactions involving non-EU entities.

Importantly, these reforms would not only ease the regulatory burden on banks but also on insurers – under a revised Solvency II framework – whose participation in synthetic STS transactions is viewed as essential for expanding the investor base beyond traditional banking institutions. In addition, these changes would also help unlock much-needed liquidity and financing for Europe’s green transition.

State support can also strengthen the European securitisation market, as the report mentions the creation of a platform for the use of government guarantees to stimulate issuance. However, the TSI and BdB report argues that regulatory amendments must take precedence over more costly and time-consuming solutions like such government-backed platforms.

“At the same time, we explain why the regulation should be adjusted with highest priority and why proposals such as a European securitisation platform with state guarantees might not be the best idea,” says Hülbert, emphasising the need for faster and more cost-effective regulatory changes.

Many of the reforms suggested in the report – such as lowering costs, improving eligibility for liquidity coverage ratio (LCR) requirements and streamlining supervisory verification (SRT processes) – could be implemented quickly, and see fairly immediate positive effects. 

In the immediate term, the report acknowledges that improving the regulatory framework could deliver instant benefits by making securitisations more attractive to both investors and originators. And of course, a more liquid market could also help reduce the financing costs for green and digital investments – allowing securitisation to fund vital transitions.

In the example of Germany, while no robust green ABS market has yet been established, the study from TSI and BdB notes this is in part the result of existing transparency requirements rendering green bond labels redundant. However, across Europe, given a more liquid and functional market, more innovative green financing mechanisms could emerge to support the financing needs of the transition.

In the medium term, the report’s proposed changes could be beneficial in funding the energy and digital transition by transferring risk away from banks onto a more diversified group of investors. This risk transfer would free up capital for further lending to SMEs, which are an essential driving force behind financing the transition towards a greener and more digital economy. 

“Strengthening the securitisation markets will contribute to finance the huge investment needs for the transition,” Hülbert notes. “Securitisation covers a wide range of asset classes, from short-term trade receivables, auto and leasing to real estate finance, all of them being positively affected. Of course from a broader perspective, private and public equity markets will need to be further developed at the same time.”

Beyond the immediate benefits, establishing a more robust securitisation market as proposed by the report could aid in the long term to support Europe in becoming more competitive and strategically independent. By strengthening the connection between the loan markets and capital markets, the continent could reduce its reliance on non-European financial institutions and deepen its own capital markets. This is an important feature in light of the needs for funding the energy transition found in securitisation – from solar ABS transactions seen across the globe, to utility ABS deals seen in the US (SCI Premium Content - October 2023).

However, there are multiple signs that the mood in continental Europe has shifted positively in favour of securitisation in recent years. Matthew Jones, head of EMEA specialised finance at S&P tells SCI: “In the EU, there is a lot of positive sentiment towards improving the competitiveness of the asset class. Now that the new EU commission has been appointed, let’s hope the politicians can match that positivity with policy.”

He continues: “It’s worth remembering that for the EU, in a post-Brexit world, they are not just competing against the US, but they also have the UK on their doorstep, which has also been reviewing its rules and regulations.” 

The proposals outlined by TSI and BdB appear to offer a pragmatic, cost-effective path forward. TSI’s Hülbert says: “Our proposals have been very well received so far in Berlin and in Brussels.” 

Nevertheless, for the potential of the European securitisation market to become a cornerstone of the continent’s financing ecosystem and core financing tool in funding transitions to be realised, regulators will need to respond quickly to calls to lower the barriers to entry currently inhibiting market growth.

Claudia Lewis