03 July 2024

Bruegel's Christie: EU securitisation push needs markets, not housing guarantees

Scale and liquidity are two challenges that remain in the pursuit of EU securitisation. CMU tops the wish lists of European Union leaders, outside experts and seasoned financial insiders as a way to find the extra €1 trillion or more needed annually for the green and digital transitions.

Capital markets union tops the wish lists of European Union leaders, outside experts and seasoned financial insiders as a way to find the extra €1 trillion or more needed annually for the green and digital transitions. But after 10 years of trying, the EU has managed only marginal improvements. Cross-cutting issues including pensions, taxes, insolvency and housing have proven too thorny to make much headway in Brussels. 

For the next push, policymakers should pick areas where they can make a difference. Three seem particularly promising: joint supervision, retail investing and securitisation – the  combining of loans or other assets into securities that can be sold and traded.

Europe used to have a decent securitisation market, but since the 2008 financial crisis, its issuance shrivelled while the United States has boomed, issuing €1.3 trillion in 2023 compared to a paltry €213 billion for the 27-country single market. 

The European Central Bank wants more, so that banks can free room on their balance sheets for new loans. In March it suggested that updated risk-management standards and targeted guarantees – so that loans would be easier to bundle – could help. Meanwhile former Italian premier Enrico Letta’s single market report suggested simplifying the EU’s securitisation framework and giving more attention to green securitisations, which could either bundle green assets or make proceeds available for further sustainable investment.

When it comes to prudential standards, the trick will be for regulators and market stakeholders to find ways to unlock the market without spurring undue risk. In the US, subprime mortgage securities were once deemed safe, only to set off a global financial crisis. Europe can take technical steps to loosen up without courting disaster; for example there is active debate about whether the Solvency II insurance rules need further updating so that insurance companies could invest more in this area. That said, policymakers should not relax standards solely to boost certain market segments.  

Experts are now coming forward with more ideas. Unfortunately, some of them are bad. In particular, it would be a misstep to start guaranteeing residential mortgages, as floated in a report commissioned by the French finance ministry. Europe does not need a counterpart to Fannie Mae and Freddie Mac, the two Washington-backed giants that are enmeshed so deep into US markets that they required colossal bailouts and nationalisation. US lenders’ access to government-guaranteed middlemen, which adds moral hazard and mortgage market distortions, is not a good model to copy....

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