Great white hope of EU capital market plans a bust, think tank says

The EU’s hopes of boosting finance via the controversial practice of securitisation could prove futile, according to a report published on Tuesday by think tank Finance Watch. 

Banks have argued they should once again be allowed to package up and sell off loans to free up balance sheets.

But Finance Watch, a Brussels-based lobby group, argues this won’t help the EU strengthen capital markets, and could once again expose taxpayers to massive banking bailouts.

“The discussion about reviving securitisation in the EU has been amplified well beyond its practical relevance,” Christian Stiefmueller, senior research and advocacy advisor at the think tank, said in a statement, adding that it was “difficult to see” how it might help the EU secure alternative forms of financing.

In reality, just 30% of the structured loan products are placed on capital markets, and any reform could mean banks boost their profits rather than lending, the think tank said.  

Over a decade ago, the widespread use of securitisations sent financial markets into a panic, leading multiple lenders to seek government aid – after a collapse in the US housing market meant many of the supposedly safe structured loan products became toxic.

Banks and some policymakers now believe that the pendulum has swung too far the other way, and that capital restrictions designed to avoid a repeat now unduly constrain the market.

Allowing banks to transfer risks to investors could allow the EU to ape the US, where securitisation markets are three times the size, the European Central Bank’s Christine Lagarde has said.

In a paper earlier this year, finance ministers picked the issue as the number one topic to boost EU capital markets – perhaps because other, more substantive issues such as centralised supervision or common tax policies are politically complex.

European Commission President Ursula von der Leyen has also tasked Maria Luís Albuquerque with “reviving” the mechanism, in a letter which named the former Portuguese minister as the bloc’s top financial services official.

But this isn’t the first time the Commission has been accused of watering down post-crisis banking rules.

Last Thursday, the EU effectively agreed to delay reforms to market risk rules by one year, after a three-month objection period lapsed – a bid to avoid a mismatch with the US which could put EU banks at an unfair disadvantage.

All eyes are now on whether the US drags its feet further in finalising international banking reforms known as the Basel rules  – given that a victory by Republican candidate Donald Trump could presage a regulatory bonfire.