Provided it is sufficiently regulated, securitisation can help to fund the economy and share risks within the monetary union. Securitisation combines the advantages of banks in lending and of financial markets in financing. However, a lack of standardisation and legal harmonisation currently prevents the EU from reaping the benefits of this instrument. Weakening the prudential framework will not create a truly European market but may pose new risks to financial stability. Instead, this Policy Brief argues that to scale up securitisation, overcoming the fragmentation in national contract and insolvency laws in the longer term will be key. In the meantime, the European Commission should cut unnecessary red tape and establish an EU-wide standardised securitisation product tailored to an asset class that shows sustainable growth potential. Renovation loans are a promising option.

Securitisation might soon make a comeback in Europe. A technique used by banks to convert illiquid loans into tradable securities they then sell on capital markets, securitisation allows banks to free up capacity on their balance sheets and tap into alternative sources of financing. During the global financial crisis, securitisation issuances fell sharply. Although regulators identified the technique as an important amplifier of the crisis, the United States (US) market quickly recovered from the shock. In Europe, however, attempts to overcome the stigma left over from the financial crisis came to nothing. After introducing a new class of simple, transparent, and standardised securitisations, the European Commission as recently as 2022 rejected further changes to the EU legal framework. However, now the era of expansionary monetary policy is over and banks must compete for depositors, calls for reviving the European securitisation market are getting louder. The latest case is the Eurogroup statement on strengthening EU capital markets.

There are numerous arguments for reviving European securitisation markets now. The securitisation market in the US is ten times bigger than in the EU and many consider this to be a competitive disadvantage for funding Europe’s economy. Arguing that securitisation is vital to addressing financing requirements raised by the green and digital transformations, the finance industry urges lawmakers to reduce capital requirements for banks’ securitisation positions. And the Governing Council of the ECB envisages public guarantees to support targeted segments of securitisation. According to estimates commissioned by the European Banking Federation, if banks securitised half of their mortgage portfolio, this would result in an additional lending capacity of nearly €1 trillion. Beyond providing banks with capital relief, securitisation can help to channel money from capital markets into bank funded projects and share risks across the entire financial system. That is why central bankers and regulators support the idea of an increase in securitisation transactions.

Policymakers should, however, not jump to hasty conclusions. Lowering capital requirements will not create vibrant US-style capital markets in Europe but may pose new risks to financial stability. Still, it is worth reaping the benefits of securitisation for funding the European economy and private risk-sharing in the monetary union. To build a truly European market, this Policy Brief argues that the fragmentation among national markets is still the biggest showstopper to scaling up securitisation. The introduction of a new class of simple, transparent, and standardised securitisations has helped but is still insufficient. As is the case for the Capital Markets Union more generally, harmonising national contract and insolvency laws is key. Yet, while creating a single legal area will take time, the EU should in the meantime cut unnecessary red tape for issuers and investors and further strengthen the EU-wide standardisation of securitisation products. A focus on renovation loans seems particularly useful given the importance of housing retrofits for achieving Europe’s climate targets and for mitigating climate risks that endanger financial stability....

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