The research paper by Thomas Papadogiannis Varouchakis critically assesses the European securitisation market, particularly the effects of regulatory discrepancies that have impeded its recovery post-Global Financial Crisis (GFC). The key findings and recommendations from the paper highlight the challenges and propose solutions to revitalize this market, which is crucial for financial diversification and stability in Europe.
Key Findings
- Regulatory Disparities: The paper confirms that the European securitisation market suffers from a regulatory imbalance when compared to other financial instruments like whole loan pools, corporate bonds, and particularly covered bonds. This uneven playing field has resulted in a ‘crowding out’ of Residential Mortgage-Backed Securities (RMBS) by covered bonds, which receive more favorable regulatory treatment.
- Impact of Regulatory Framework: The introduction of the Securitisation Regulation (SECR) in 2019, designed to revive the market, has not achieved its goal. The stringent and complex requirements have limited the attractiveness and accessibility of securitisation as a financial tool, particularly affecting small and mid-sized enterprises (SMEs).
- Market Performance: Despite regulatory efforts, the market has not recovered to pre-GFC levels, and issuance volumes have remained subdued compared to other financial markets like the U.S. or covered bond markets in Europe, which have shown resilience and growth even during economic downturns.
Recommendations
- Regulatory Recalibration: A fundamental reform of the securitisation regulatory framework is recommended to level the playing field with other financial instruments. This includes simplifying the requirements for Simple, Transparent, and Standardised (STS) securitisations and adjusting capital and liquidity requirements to make them less punitive compared to other instruments like covered bonds.
- Enhanced Transparency and Simplification: The paper suggests reducing the complexity of disclosure and due diligence obligations, particularly for private and intragroup transactions. This could lower the barriers to entry and operational costs for issuers and investors.
- Promoting Investor Base Diversification: Encouraging a broader and more diverse investor base, including non-banking institutions like insurance companies, could enhance market depth and liquidity. Adjustments to regulations under Solvency II could make securitisations more attractive to these entities.
- Addressing Market Sentiment and Education: Increasing awareness and understanding of the benefits and risks associated with securitisation could help improve market sentiment. Educational campaigns and transparent reporting could demystify securitisation for potential new entrants.
- Monitoring and Feedback Mechanisms: Establishing robust monitoring and feedback mechanisms to continually assess the impact of regulatory changes and market developments. This would ensure that the regulatory framework remains responsive and effective in promoting a healthy securitisation market.
Summing up
In conclusion, Varouchakis argues that without these comprehensive reforms, the European securitisation market may remain underutilized, thus missing out on its potential to support broader economic growth and stability. The recommendations aim to create a more conducive environment for securitisation activities, ultimately benefiting the wider European financial ecosystem.
Reading the full report, published in the “Journal of Financial Regulation”