Advocates for the reform of securitization regulations have won the argument about whether it is necessary, but it could all count for nothing if they can’t inject some urgency into the process that follows.
Newspaper columns and reports have flowed freely from prominent politicians, making the case for more proportionate regulations that will csast off the shackled.
The regulators are also making all the right noises. At Global ABS in Barcelona, at the start of June, the cash market heard that it was top of the EBA’s agenda. Yet most think substantial changes in the EU are unlikely until at least early 2026.
Waiting that long, for consultation after consultation, would risk the momentum behind the move for reform dissipating. Already, the momentum has been slowed by the European parliamentary and French elections.
The risk comes from the fact that securitization’s advocates have built their argument around European integration. The market is central to the Capital Markets Union, they argue, which is a necessity to strengthen the EU in time of great power conflict and political fragmentation.
It is not a narrative tailored to the far right or the far left, both of which are sceptical of the EU and of bank profits. Perhaps securitization reform could fly under the radar if Europe’s national governments shift to the right, but it is also possible that the process is struck down under either of those two objections.
There are certainly other ways to make the case that would be more appealing to either political extreme. One could argue that securitization is one of the most efficient ways to connect domestic savers and borrowers, forexample.
What is more natural than a young family’s €500 a month mortgage payment covering the neighbouring elderly couple’s pension? What better way than ABS to circumvent bank loans and get savers' money safely into domestic SMEs?
The point is that when post-2008 securitization regulation is so out of sync with the way the rest of the capital markets are governed, it’s easy to tailor your arguments to different audiences. But to win the argument all over again could take another decade.
The challenge, therefore, is to get the process moving while there’s political will and legitimacy to do it. European legislators showed they could act decisively during the pandemic and in theory the pieces are in place to move quickly again.
The market’s wish list has already been laid out and extensively debated. Afme published a five point plan during Global ABS for how to get the EU securitization market “back on track”.
The current rules effectively lock out insurance investors, and limit bank participation in the market as both investors and issuers. In many cases that doesn’t even seem to be by design and it doesn’t help make either sector more stable.
It’s worth repeating that securitizations have performed outstandingly up against the many stresses of recent years. The paper was among the most liquid during the 2022 LDI crisis. The primary market snapped back after SVB and Credit Suisse collapsed. Securitization’s advocate’s would argue the evidence is there to move quicker.
As they argue, in a world of blocs, you are either a bloc or the vassal of a one. With a Donald Trump victory looking more likely than ever in the US presidential election in November, perhaps Europe will be persuaded that it has to decide which it wants to be and will finally get things moving.