New EU rules on securitization will come into effect Jan. 1, 2019, in a bid to restart the market for asset-backed securities in Europe and as part of efforts to create a unified capital market within the bloc.
The new rules on securitization, a process by which a lender converts loans or assets into bonds and sells them on to investors, would enable companies to seek new ways of funding, help banks support the economy and spread risk across market participants, the European Commission said.
The EC estimates that the securitization market could unlock some €150 billion in additional funding for Europe's real economy if it were to return to precrisis levels. Bank lending in Europe accounts for 75% to 80% of total funding of the economy, and the idea is to create more funding sources for small and medium-sized businesses and households.
"This legislation is one of the cornerstones of the Capital Markets Union, the commission's pivotal project to build a single market for capital in the EU," Valdis Dombrovskis, EC vice president responsible for financial stability, financial services and capital markets union, said Dec. 30.
"It will free up bank lending so that more financing can go towards supporting our companies and households."
The EC proposed new securitization rules in September 2015 as part of its capital markets action plan, but enacting the project has been a thorny issue, largely because the securitization market helped spark the previous financial crisis.
A safer framework
However, it said the new simple, transparent and standardized framework would not resemble that of the U.S. subprime mortgage securitization market that was a driver of the financial crisis. The new rules are designed to protect the EU securitization market from the dangers of the past and will differentiate between simple and more transparent securitization products and other products, which do not meet the necessary criteria, the EC said.
Securitized assets must not mix different kinds of loans — car loans must only be packaged with car loans and residential mortgages with residential mortgages — and must be created according to the same lending standards as any other loan.
Under the new rules, institutional investors will have to demonstrate to regulators that they understand securitization investments and have calculated the risks involved. They will also need to monitor performance and ensure the securitization's original lender is compliant with the rules.
The new regulations also ban resecuritizations and prohibit residential mortgage-backed securitizations backed by loans marketed and underwritten with information not verified by the lender. Banks offering securitized debt may be eligible for lower capital requirements against the debt to encourage issuance, but they will also have to retain at least 5% of securitized instruments.