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Frustration and warnings over CMU’s plans for promoting securitisation

In September last year, the European Commission announced new rules for the EU securitisation market as part of its Capital Markets Union (CMU) Action Plan, which aims to build a single market for capital across the 28 EU member states. The new approach to securities could generate up to €150bn in additional funding for the European economy, according to the Commission.

The regulatory framework for securitisation sets out “simple, transparent and standardised regulations” that are subject to “adequate supervisory control”. The Commission estimates that if EU securitisation issuance was built up again to pre-crisis levels, it would generate between €100-150bn in additional funding for the economy.

The Commission's Ugo Bassi, director general at the DG for Financial Stability, Financial Services and the CMU, in a recent interview with IFLR, outlined three obstacles to a revival of the EU securitisation markets, including stigma from the financial crisis, a “scarcely risk-sensitive prudential treatment” and “extraordinary monetary policies”.

Securitisation “useful for when monetary policy normalises”

He said: “The current environment of extra low interest rates and ample liquidity provision by central banks enormously reduces the need for funding alternatives for banks, including securitisation. This clearly reduces the incentive to issue securitisations. However, building solid securitisation markets will become very useful for when monetary policy normalises.”

Frustration with slow pace of progress

The development of the EU's securitisation market is the cornerstone of the CMU Action Plan – but not everyone is happy.

Dutch MEP Cora van Nieuwenhuizen told Global Capital magazine in April that she was frustrated with the pace of the framework’s progress through the European Parliament, adding that many politicians still viewed the asset class with suspicion, despite the strong performance of European securitisations during and since the financial crisis.

“Bad and risky”

She told the magazine: “There’s a very common perception on the left of the European Parliament — even within the economic and monetary policy committee — that it is bad, and risky.” She added: “It’s frustrating that Parliament is moving so slowly after the Council had moved so quickly to push the proposal through.”

Is the CMU a “paper tiger”?

Van Nieuwenhuizen also said that, unless politicians focus on making progress with initiatives such as the development of the securitisation market, the entire CMU project risked becoming a “paper tiger”.

Alarm bells ringing

And, as reported in Euractiv, the European Commission’s desire to boost securitisation is “ringing alarm bells” in other quarters too, namely among academic and civil society groups, who urge caution and warn that promoting securisation could bring new risks that will damage the economy.

Only good for big banks?

Christophe Nijdam, secretary general of Finance Watch, writes that “there is a lot of money to be made from this proposal, especially by large banks. And while securitisation will increase some kinds of borrowing such as mortgage lending, it is far from clear that the EU’s economy needs more debt of this kind.”

He also expresses the concern that the initiative to promote securitisation will not integrate lessons from the 2008-9 crisis and that it could reintroduce more risk into the financial markets: “There is a significant risk that lobbying will make the legislative proposal even more industry friendly than it is already, failing to integrate the lessons from the crisis. We should not forget that securitisation greatly amplified the impact of the subprime crisis by facilitating the originate-to-distribute model, increasing the interconnectedness that made it systemic, encouraging conflicts of interest and discouraging proper due diligence because of excessive complexity.”

Nijdam's main concern is that citizens will bear the brunt if things go wrong in the European securitisation market in future – a consideration currently being overlooked by the financial industry.

The CMU's draft plan for a securitisation framework is due to be presented for a vote in parliament in January 2017.

CTMfile take: Finance Watch raises a point of view that's not discussed enough in financial circles but this should be of interest to corporates – and therefore corporate treasurers – too. Any initiative to promote a financial instrument in the EU must safeguard the interests of the economy as a whole. If it's potentially damaging to citizens, it's damaging to the whole economy and companies will also suffer. While an initiative that could boost an alternative source of financing for corporates is to be welcomed, this must not be at the cost of triggering another systemic crisis.   

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