European Commission eyes securitisation as way to boost EU’s economy

After years of being discussed as a way to boost the European Union’s economy, securitisation is now firmly at the top of policymakers’ priority list for the 2024-29 legislative term. There is hope that the recently published amendments to the securitisation regulation (SECR) will help lower the barriers for institutional investors – although some market participants believe a cultural shift is also required for a successful revival.

“One of the challenges facing the EU is that its markets have long been overregulated, but regulators are now recognising the need to broaden it out,” says Agnès Lossi, partner at strategic consultancy Indefi. 

She adds that this shift is a crucial part of the broader effort to integrate the bloc’s capital markets and unlock funding for the EU real economy – supporting projects ranging from infrastructure and green energy to innovation and digital transformation – that will drive growth and boost Europe competitiveness. 

The SECR came into force six years ago to resuscitate the market whereby assets such as corporate debt, car loans and mortgage borrowing are bundled into securities that banks can sell to investors. It comprised a range of measures around due diligence, risk retention, disclosure requirements as well as criteria for identifying transactions that qualify as simple, transparent and standardised securitisations (STS). 

While industry experts applauded its aims of stronger investor protection and financial stability, the high costs for compliance and complicated requirements stifled activity. In addition, Europe has an alternative – covered bonds – that benefit from a more favourable regulatory liquidity treatment than securitisation bonds, according to a recent report by Deutsche Bank. 

This helps explains why instead of increasing, issuance plunged from a peak of €711bn in 2008 to €144bn last year. This is sharply lower than the US where average annual issuance was about €2trn (€1.7trn) over the 2013-24 period. 

The recently published amendments, which were a result of last year’s consultation by the Commission, are designed to stimulate demand, cut red tape and lower barriers. They are also hoping to widen participation beyond France, Germany, Netherlands, Italy and Spain which account for roughly 80% of EU issuance with the UK comprising around 15-20% in the wider region. 

The proposals range from reducing the fields of reporting by at least 35% to adjusting risk weights and liquidity coverage ratio treatments. Also on the list is the halving of the minimum risk weight of senior positions in STS securitisations from the current 10% and dropping the floor for senior non-STS tranches to 10-12% from today’s 15%. 

Blueprint for regulatory easing

Market participants will have to wait longer for a blueprint on expanding the investor base to pension funds and insurers, however. Both were active participants before the global financial crisis, and the industry is hoping the next set of amendments will lead to a reduction in the risk-based capital requirements in Solvency II.

It is too early to tell whether the Commission will offer enough of an incentive. As Tristan Teoh, head of European secured finance at Insight Investment, notes, “From our perspective, this continues to be the most significant question,” he adds. 

“We believe the proposals will increase demand from banks, particularly with respect to the changes to the STS framework and reduction in risk charges for banks investing in the asset class.”

Teoh notes that the proposals for insurers remain unclear for the moment, with the Commission due to issue draft amendments to the insurance Prudential rulebook in the coming weeks. “Likewise, we think the regulation is less compelling for non-STS securitisations,” he adds. 

“In conjunction with these, a broad change in the perception of European regulators and policymakers is necessary to address some of the negative misconceptions of the asset class and promote usage of securitisation as a tool for credit intermediation between borrowers and capital providers.”

Some also believe there needs to be a change in attitude if the EU wants to emulate the US model. While Europe does have an investment banking culture, many industries note it is more risk averse, with tighter regulatory constraints, especially after the global financial and eurozone crises and Basel III. 

In addition, most European investment banks are part of larger commercial banks, unlike some US boutiques or pure-play banks.

While opinions differ, all agree that change will not happen overnight. As Andrew Lennox, senior portfolio manager at Federated Hermes, says, it will be a slow process, especially since it has been more than 11 years since the Bank of England and the European Central Bank published a joint paper arguing the case for a better-functioning securitisation market.

“It’s a fine balancing act trying to open the market with avoiding the pitfalls,” he adds. “The regulators have to act responsibly but they can look at the US to see the benefits and how securitisation can boost lending to the real economy.”

Collaterised loan obligations

The one area of securitisation that has taken hold in Europe is collaterised loan obligations (CLOs), which package together loans of varying risk levels made to companies. 

They are typically structured with a ‘cashflow waterfall’, which provides the prospect of relatively consistent monthly income and yields currently higher than other similarly rated fixed income such as government bonds. Moreover, as 90% are floating rate instruments, they can provide protection against interest rate risks.

While the US accounts for roughly 75% of the market, the asset class has gained momentum on the continent over the past 12-18 months. Figures from Pitchbook show new-issue volume was €27.7bn for the first half of 2025, up from €22.8bn over the same period in 2024. It is also more than half the €50bn top-end estimates by research desks before the start of the year. This is despite a forced pause in April when US president Donald Trump announced the ‘liberation day’ tariffs.

Seán Golden, managing director and portfolio manager at AlbaCore Capital Group, notes that Europe is attracting attention because of its more stable political environment and strong fundamentals. 

“Although the tariffs are a headwind, they have limited direct impact because there are national champions and many of the companies are domestically focused,” he adds. “To date, the largest exposures have been in the healthcare, telecommunication and defensive sectors.”