British and European banks are braced for changes due to pass through the European Parliament tomorrow which aim to spur the rehabilitation of securitisation, or the practice of packaging up and selling loans.
All banks in Europe, including those in the UK, will have to abide by the new rules on securitisation, the much-maligned practice of packaging up and selling on bundles of loans.
Banks face a “period of adjustment”, according to Kevin Hawken, a partner at US law firm Mayer Brown. The rules take effect from 1 January 2019, three months before the official Brexit date.
Meanwhile technical standards which will be crucial in determining the precise detail of the regulations remain to be drawn up.
The regulations will also mandate the creation of a new regime for simple, transparent and standardised (STS) securitisations. STS securitisations will qualify for more lenient capital requirements, making them potentially more profitable for banks.
However, the difference in capital requirements may not go far enough to boost the industry, according to Hopkin. "Many of our members feel that it doesn't bring the capital requirements down enough," he said.
Securitisation has long played an important role in risk management for many banks, with similar loans bundled together and moved on, but its reputation took a severe hit after the financial crisis, when complicated and ill-understood instruments concealed massive risks and sometimes worthless underlying loans from investors.
Yet regulators including the European Central Bank are keen to spur a bigger securitisation market in Europe in an effort to increase the efficiency of risk sharing across the continent and boost lending in the economy.
European governments have realised “it could have a place in helping develop greater capital markets funding capability”, said Hawken. "A lot of investors got scared of it, the regulators became very concerned with it, so the securitisation market in Europe shrank dramatically and has not fully recovered."
The European Parliament will vote tomorrow on two parallel regulations, one of which aims to harmonise multiple separate regulations on securitisation, as well as changes to capital requirements for banks.
“Everybody is relieved that it looks like we're going to get there,” said Richard Hopkin, head of fixed income at the Association for Financial Markets in Europe (Afme), an investment bank lobby group.
“It will give the industry some certainty,” he added, despite some parts of the regulations which are “not optimal”.