(Bloomberg) — The European Union reached a provisional agreement to overhaul rules governing the bloc’s securitization markets, a deal that would unleash billions of euros to finance initiatives in key areas such as defense and climate resilience.
Policymakers reached a political-level compromise to push ahead a plan that would allow banks to free up more capital to lend to households, firms and infrastructure projects. The framework would reduce banks’ capital requirements for low-risk deals and reduce administrative burden for market participants. The framework still needs to be finalized and formally endorsed.
The initiative is part of the EU’s savings and investment union, a package of reforms that aims to channel financial assets more efficiently and spur growth by funding key industries. The 27-country bloc is going ahead with reforms to the securitization markets at a time when geopolitical uncertainty, high energy prices, government deficits and worries over the debt-fueled AI boom are pushing up risk premiums across credit markets.
“A well-functioning securitization market can help diversify funding sources, improve risk-sharing and unlock additional financing for investment, innovation and job creation,” Financial Services Commissioner Maria Luís Albuquerque said in an statement Thursday. “This is what the Savings and Investments Union is about.”
Europe had a total of €1.295 trillion ($1.45 trillion) of securitizations outstanding, including collateralized loan obligations, at the end of March, according to the Association for Financial Markets in Europe. While that figure had grown 6.3% in a year, it is still a fraction of the US securitization markets.
“Securitization plays a vital role in our financial eco-system by freeing up capital and supporting lending,” a representative for the Irish government, which holds the EU’s rotating presidency, said in a statement. “Our objective here is simple: support market revival without compromising financial stability, investor protection or market integrity.”
Boosting the securitization market is part of measures outlined by former European Central Bank President Mario Draghi to increase the bloc’s economic competitiveness. The review of the securitization rules started in 2024.
Some elements of the reform:
- Low-risk securitizations will benefit from materially lower capital requirements, while higher requirements are maintained for riskier securitization positions.
- Introducing a new ‘resilient’ category of securitizations on top of simple, transparent and standardized (STS) a label that entitles access to favorable bank-capital rules, in bid to enhance investor confidence.
- Establishing EU-level supervision for the independent entities that verify STS-compliance
- Reducing red tape compared to the current rules to cut costs for investors
- Raising investment limits for institutional investors using investment funds known as UCITs, to stimulate market growth
- Enabling bigger participation of insurers and re-insurers in the synthetic securitization markets, and facilitating the use of such transactions to finance projects before they hit their operational phase.
(Adds quote from European Commissioner in 4th paragraph)
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