Securitization Is Back! EU Launches Capital Markets Union

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The European Commission is trying to create a single market for capital across the continent to increase and diversify the funding sources for Europe’s business and long-term projects. In the EU, mid-sized companies received five times less money from capital markets than in U.S.

According to Brussels’ estimations, Europe needs up to €2 trillion in total infrastructure investment by 2020, and simple and transparent securitisations could be one way of obtaining this. The free flow of money amongst the 28 Member States is part of the EU treaties, but the markets are still underdeveloped and fragmented.

Yet the securitization initiative, one of the main pillars of the new Capital Markets Union (CMU) project, is the subject of some dispute. This is because it looks similar to the subprime lending practices used by US investment banks which caused the financial meltdown in 2008.

“Competitiveness concerns should not allow us to forget the lessons from the crisis too quickly,” fears Fréderic Hache, Head of Policy Analysis at Finance Watch, who explains that “the new framework for simple, transparent and standardised securitisation should only promote truly simple securitisation.”

New securitisation regulations will be based on simple, transparent and standardised assets. Lender banks should have to maintain at least 5% of the total amount of mortgages and loans converted into tradeable securities. No re-securitisation, as practised by Lehman Brothers, will be allowed but alarm bells have been ringing.

“The framework should exclude tranching in order to be truly simple,” they said at Finance Watch, an independent association based in Brussels which monitors the financial sector.

The European Commission is focused on restarting the securitisation markets, bringing back to just half  pre-crisis levels of over €100 billion of additional funding for the real economy. The CFA Institute, another independent financial viewer, is less scared about it.

“The crisis in Europe was not caused by securitisation, this happened in the U.S. This market was always more secure in Europe and, right now, there are a lot of SMEs which really need it to get loans and financing,”explains Josina Kamerling, head of regulatory outreach for EMEA.

The problem could be if the new CMU becomes a tool for building sinthetic structures or shadow markets. Until now, the EC and the European Parliament are determined to avoid this, but 2016 could show us if Lehman Brothers is back.

About the Author

Alexandre Mato
Alexandre Mato covers European affairs from Brussels. Former Editor in-chief of Cierre de Mercados, he was the first ever editor on Spanish TV appointed under the age of 30. He has a degree in Journalism and a postgraduate in International Relations, both from Universidad Complutense de Madrid.