Monday marked the third anniversary of Russia’s invasion of Ukraine. With Europe frozen out of peace talks, its seat at the global policy table is in jeopardy.
Last week US president Donald Trump referred to Ukrainian president Volodymyr Zelenskyy as a “dictator” for refusing to hold elections during the war. Trump’s attitude to Europe is clearly hostile, compared with the Biden administration's.
French president Emmanuel Macron flew to the US on Monday to discuss the conflict. His influence appears limited. Trump refused to call Russian president Vladimir Putin a dictator, when asked by a journalist in the Oval Office on Monday.
It is difficult to read these comments and be confident America will remain a strong supporter of European interests while Trump is in office.
In the current geopolitical environment, where it is unclear whether Europe can rely on the US to be a supportive partner, the European economy needs to improve, to maintain its position on the global stage.
This is creating an environment in which regulatory reform for one of Europe’s weaker financial sectors, securitization, is being seriously considered.
Since the 2008 financial crisis, the US has outpaced Europe in securitization issuance by a long way. Total US issuance was six times that of Europe in 2023, according to the Association for Financial Markets in Europe.
A key reason for the European market's weakness is the regulatory environment for securitization.
Macron raised this issue in a CNN interview earlier this February.
“You have much more savings in Europe than in the US,” he said. “The problem is we are not united, we are not efficient and we over-regulate the [financial] sector.”
One of the securitization regulations Macron wants reformed is Solvency II, which governs capital rules for insurance companies.
Under the existing framework, an insurer that buys a five year, triple-A rated commercial mortgage-backed security faces a capital charge of 62.5%. If it owned a property outright, it would only have a charge of 25%. This is patently absurd.
Under the EU's rules, this comes about because CMBS do not meet the criteria to be considered simple, transparent and standardised (STS) securitizations. It is nearly impossible to have a standardised CMBS.
Given the high level of credit enhancement protecting these senior tranches, it is fair to question the necessity of these regulations.
Another issue is securitization's treatment under the Liquidity Coverage Ratio.
Currently, the LCR rules state that an STS securitization can only qualify for level 2B treatment, the same as an unrated covered bond. Level 2B assets can only make up 15% of a bank’s liquidity buffer, as opposed to 40% for a level 2A asset.
Concerns about the fairness of these regulations have been raised for several years. However, the rapidly changing context of a Trump presidency means it is time for the European Commission to take these issues much more seriously.
The Commission is still preparing to publish its response to a consultation on the functioning of the EU securitization framework, held from October to December 2024.
When deciding on its response, the Commission must not only consider the risks of deregulating the sector, but also the risks of making no changes to the securitization framework and allowing Europe to continue to fall behind the US in its use of this valuable financing technique.