Securitisation: Will the European Commission’s recent attempt to relaunch be the right one?

Faced with the need to find the necessary funding for the massive investments required for the energy and technological transitions identified by Mario Draghi in his report, and for Europe's defence remobilisation (Readiness 2030), on 19 March, the European Commission unveiled its strategy for a "Savings and Investments Union" (SIEU), of which securitisation is an essential part. On 17 June, the Commission also proposed new measures to boost securitisation activity in the EU while preserving financial stability. These measures are a good basis for relaunching the securitisation market. However, certain aspects could benefit from improvement. Above all, in order not to slow down investors and relaunch this market, it is crucial to align the capital requirements imposed on securitisations with those relating to other assets of comparable risk.

As a reminder, securitisation, in its so-called "cash" version, is a mechanism that consists of banks grouping loans into relatively homogenous "packages", then transferring them to a special purpose vehicle (SPV), which in turn transforms them into more liquid securities (the units issued by the said vehicle) . Some of these securities are kept on the balance sheet of the originating bank, while others are placed on the market with institutional investors and acquired by other banks. The bank equity freed up on the balance sheet of the originating bank as a result of the sale of transferred loans can thus be reallocated to financing new projects. Today, in the European Union, a large proportion of securitisations are synthetic, meaning that the risk is transferred, but the underlying asset remains on the balance sheet of the originating bank.

The wheat without the chaff

Securitisation has a number of other merits: diversification and a better spread of risk, increased liquidity that facilitates the exchange and valuation of previously illiquid assets, and the ability to adapt the risk/return trade-off to investors' preferences (who benefit from more opportunities as a result). These characteristics make securitisation a powerful tool for improving market efficiency, savings allocation and the potential for financing the economy. However, securitisation needs to be regulated in order to avoid the moral hazard that can lead some originators to dispose of "bad risks" or to "originate" certain loans with the sole aim of placing them with investors. In order to avoid this pitfall and align the interests of originators with those of investors, after the 2008 crisis, the Basel Committee recommended that the originating bank be required to retain at least 5% of securitised exposures on its balance sheet. This recommendation was translated into European law in 2011.

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