The European Central Bank (ECB) has voiced concern over the European Commission’s latest proposal to relax rules around bank securitisation, warning that the changes could introduce new risks into the financial system.
Securitisation is a process where banks bundle together loans, such as mortgages or corporate debt, and sell them as securities to investors. This practice played a central role in the 2007–2008 global financial crisis, when overly complex and risky securitisation deals contributed to the collapse of major banks and a worldwide recession. Since then, Europe has been cautious about reviving this market.
In June, the European Commission suggested easing some of these rules to free up bank capital, making it easier for lenders to provide credit and to help Europe compete more effectively with the United States, where securitisation markets are larger and more active.
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However, ECB supervisor Pedro Machado argued this week that the proposals may go too far, especially in allowing more complex and potentially opaque deals. He said that securitisation comes with inherent risks that are not always easy to measure, such as reliance on financial models or conflicts of interest between banks and investors. Machado also highlighted that there is no clear evidence that securitisation automatically leads to more lending in the economy.
One area of concern is the growth of synthetic securitizations in the EU. Unlike traditional securitisation, where loans are sold off to investors, synthetic versions involve banks keeping the loans on their books while transferring the risk to investors in exchange for a fee. Since these loans remain on the bank’s balance sheet, they do not bring in fresh funding but still expose investors to credit risk.
The European Commission’s proposal
The European Commission’s proposal includes changes such as reducing the amount of due diligence required from investors, lowering transparency standards for private transactions, and cutting back on disclosure paperwork. While these steps may make it easier for banks to issue securitisations, critics warn they could also invite more complex and less transparent structures back into the system.
Machado cautioned that Europe should avoid opening the door to complex and opaque deals. Instead, he stressed that any new framework should encourage simpler, more standardised, and more resilient transactions that do not threaten financial stability.
The debate highlights the challenge facing European policymakers, how to balance the need for economic growth and credit availability with the responsibility of safeguarding the financial system from the kinds of risks that caused severe damage just over a decade ago.
