Common EU rules on securitisation became effective on 1 January 2019 that will lead to more investment opportunities and increased lending to households and businesses according to European Commission’s press release.
Securitisation is the process where a financial instrument is created, typically by a lender such as a bank, by pooling assets (for example car-loans or SME-loans) for investors to purchase. This facilitates access to a greater range of investors, thereby increasing liquidity and freeing up capital from the banks for new lending.
The new harmonised securitisation rules, which are in force as of 1 January, are an important building block of the Capital Markets Union (CMU). They will help provide additional funding sources for companies, strengthen banks’ ability to support the economy and spread risks across market participants, while avoiding the excesses that led to the financial crisis.
Drawing heavily on the work of the international supervisory community, the new Securitisation Regulation creates common rules and sets the criteria for simple, transparent and standardised (STS) securitisation in the EU. These are a new class of high-quality securitisation. The new rules will make it easier to issue and invest in securitisations in the EU and will help ensure financial stability and investor protection.
This EU-wide initiative on ‘high-quality’ securitisation will ensure high standards of process, legal certainty and comparability across securitisation instruments through a higher degree of standardisation of products. This will notably increase the transparency, consistency and availability of key information for investors, including in the area of SME loans, and increase liquidity. In turn, this should facilitate the issuance of securitised products and allow institutional investors to perform a thorough due diligence, which helps to identify those products that match their asset diversification, return and duration needs.
In September 2015 the European Commission proposed new rules on simple, transparent and standardised securitisation as part of the CMU Action Plan. According to the Commission’s estimates at the time, if EU securitisation issuance was built up again to the pre-crisis average, it would generate about €150 billion in additional funding for the economy.
This new EU legal framework bears no relation to the securitisation of subprime mortgages created in the US that contributed to the financial crisis. The European Commission does not intend to go back to the days of opaque and complex subprime instruments. Instead, the new rules clearly differentiate between simple and more transparent securitisation products and other products which do not satisfy such criteria. This will restore an important funding channel for the EU economy without endangering financial stability.
For further information: Securitisation Regulation