04 October 2024

SUERF's Walther: European securitisation market – ready for a comeback?

Renewed political support, stronger push factors in the form of looming higher capital requirements... all provide tailwinds for the securitisation market. However, without targeted regulatory measures, a meaningful pick-up in securitisation volumes will probably remain elusive.

A well-functioning securitisation market could help to unlock capital to fund Europe’s economy and its green and digital transition. The bundling of loans into a tradable security can act as a funding tool for banks and/or allow them to transfer risk to investors, thereby creating additional lending capacity. The European securitisation market has been stagnating since the financial crisis. Issuance has been fluctuating around EUR 200 bn per year. This is much lower than in the US, where average annual issuance has been about EUR 2 tr in the period 2013-23. Renewed political support, stronger push factors in the form of looming higher capital requirements for banks and the winding-down of central bank refinancing as well as a more benign macroeconomic environment all provide tailwinds for the securitisation market. However, without targeted regulatory measures, a meaningful pick-up in securitisation volumes will probably remain elusive.

Reviving securitisation to strengthen Europe’s financing capacities

A well-functioning securitisation market could help to unlock capital to fund Europe’s economy and its green and digital transition. Therefore, securitisation is one of the cornerstones of the Capital Markets Union (CMU)¹ and figures high on EU leaders’ priority list² for the new legislative term (2024-29). Since 2019, the EU has already introduced different legislative acts to revive securitisation and there is probably more to come over the next few years. The European market has been stagnating since the peak of the global financial crisis in 2008, triggered by US subprime mortgages – not least because the instrument is considered to have contributed to the crisis. Over the past ten years, issuance in Europe remained at a relatively constant nominal level of around EUR 200 bn pa. Market-placed annual issuance has been lower still, averaging ca. EUR 100 bn. This is much less than the average annual issuance of EUR 2 tr seen in the US in the period 2013-23. However, several factors could provide new impetus for the European securitisation market in the medium term: i) renewed political support, ii) looming higher capital requirements for banks, iii) the winding-down of central bank refinancing schemes.

How securitisation can contribute to financing of the economy. The bundling of loans into a tradable security (Box 1) can act as a funding tool for European banks and/or allow them to transfer risk to investors.³ This frees up regulatory capital and creates additional capacity to lend to the economy, including the financing of green and digital projects. The European Commission estimates that a rebound of the securitisation market to pre-financial crisis levels could lead to additional lending of about EUR 100-150 bn a year.⁴ This could facilitate the access to funding, particularly for SMEs and households, which generally rely on bank loans. By aggregating these typically small loans, securitisation transforms these rather illiquid assets into tradable securities. This can also generate opportunities for investors that are not able to provide such small-scale loans themselves, including in green projects like solar panels or electric vehicles. Securitised products are potentially attractive to a broad range of investors given that the pooled assets are divided into tranches with different risk/return profiles. Admittedly, ESG-labelled securitisation so far only accounts for a small part of the market, with issuance of EUR 2 bn in 2023 (about 1% of the total).⁵ 

^{more at} Deutsche Bank

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