The European Parliament, Council and Commission agreed last night on a long-awaited package of reforms to “revive” the EU's securitisation market.
The Commission hopes that by improving the securitisation process, where assets such as mortgages and consumer credit are bundled together and sold on to investors as bonds, it will unlock up to €150bn of funding for banks to lend to consumers and growing businesses.
However, the EU was keen to point out that its push for “simple, transparent and standardised” (STS) securitisation is far from the securitisation of US subprime mortgages in 2007, which contributed to the financial crisis.
The move would “help build a sound and safe securitisation market in the EU, bringing real benefits to investment, jobs and growth”, according to vice president of the European Commission Valdis Dombrovskis.
He added: "It will free up bank lending so that more financing can go towards supporting our companies and households."
The reforms include creating a database of transactions to increase transparency, and taking a lenient stance towards any third parties involved in the process to ensure liabilities for compliance remain with the original lender.
They also bring together and simplify all securitisation rules, which are currently scattered across different pieces of legislation.
Technicalities were resolved during the process, including how much of the securitisation the original lender should be required to keep to prevent them from creating securities simply to distribute to investors.
The negotiators settled on five per cent, in line with international standards.
Last night's agreement follows a two-year delay since the European Commission announced its intention to reform securitisation as part of the Capital Markets Union plan.
Following the US subprime crisis, securitisations in the EU became strictly regulated. However, unlike its American counterpart which has picked up, the European securitisation market has remained subdued.
The EU's attempt to tackle this with the STS rules has been welcomed by the Association for Financial Markets in Europe (AFME), an industry body.
Its chief executive Simon Lewis said he was “confident that the long-term impact of the STS framework will be positive”.