High Quality Securitisation and EU Capital Markets Union – Is it Possible?

Abstract

The resurrection of the securitisation market lies at the heart of the recent EU project to build a pan-European capital markets union (CMU). This is in line with the existing policy goal to expand market-based, disintermediated financing channels, which has been ongoing since the 1980s. Initial efforts to restart the moribund securitisation market in Europe have been carried out through a number of public consultations which have more recently converged towards the Commission’s proposal for a Regulation laying down the rules to create a European framework for Simple, Transparent and Standardised (STS) securitisation.

This article provides a critical perspective on the EU project to create a capital market union and in particular on the proposed framework for STS securitisation. The critique is firstly centred on the problematic coordination of the different policy objectives, which emerged from the consultations’ responses. Secondly, it points to four specific areas of concern, namely, the difficulty to define securitisation for the purpose of the regulation, the dangers of linkages with the shadow banking system, the unresolved reliance on external ratings, and the question of STS supervision.

It is argued in this article that the persistence of these problems in the current design leads to questioning whether a revived securitisation market would still fuel the shadow banking system and create systemic risks. It is pointed out that the difficulty to regulate complex legal relationships typical of long intermediation chains – such as tranched securitisation – make the proposed framework still weak. This article submits that only a tighter approach to transaction standardisation could ensure the simplicity and transparency that the Commission is hoping to achieve. Equally, a supervisory infrastructure centred on the overseeing power of a pan-European authority is needed to prevent pre-crisis legal problems from recurring.

Keywords: Securitisation; Structured Finance; European Commission; STS Securitisation; Capital Markets Union; Tranching; Shadow Banking; Credit Rating Agencies; Financial Regulation; Financial Supervision; ESMA