The Union’s proposed reforms to its securitisation framework have experts scratching their heads. A Financial Times panel discussion, which EU Perspectives took part in, brought together four prominent figures in the field who cautiously welcomed regulatory streamlining while warning that overreach, fragmentation, and excessive punitive measures could derail the market’s revival.
Securitisation, the financial alchemy that transforms illiquid loans into tradable bonds, turbocharged global credit before the 2008 crisis, notably through mortgage-backed securities. When subprime borrowers defaulted, complex securitisations magnified losses, exposing flaws in risk models and ratings. Post-2008 reforms forced issuers to retain “skin in the game” — typically five per cent of deals — to curb reckless lending.
In response to this, the European Union undertook an enormous regulatory effort in order to mitigate the risks associated with securitisation. Then it became obvious that the rules drive away investors, effectively shrinking the market — but the current climate calls for expanding it.
The currently proposed reform of securitisation rules, therefore, aims to kill two flies with one stone, which is not easy. A quartet of foremost experts, panelists at the FT-led July debate on the topic, in which EU Perspectives participated, held differing views on various aspects of the reform. Their exchange highlighted tensions between post-2008 risk aversion and the urgent need to unlock capital for Europe’s priorities, such as defence, the green transition and infrastructure projects.
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When the market flatlines
Shaun Baddeley, Managing Director of Securitisation at AFME, opened the session by dissecting Europe’s stagnant securitisation market. “The public ABS (asset-backed securities) market has pretty much flatlined in Europe uniquely versus the rest of the world,” he said, attributing this to “challenges arising from the initial implementation regulation” post-2008.
He emphasised that reforms must address both supply and demand-side barriers, particularly for banks needing to transfer risk during “infrastructure transitions” over the next decade. “Banks need to be optimally configured to transfer risk,” he added, noting the proposals aim to adjust capital rules for SRT (significant risk transfer) trades.
Banks need to be optimally configured to transfer risk. — Shaun Baddeley, Managing Director of Securitisation at AFME
Ian Bettney, portfolio manager at Janus Henderson Investors, dissected the regulatory burden. “If you boil down the GFC, poorly underwritten mortgages were packaged into opaque instruments,” he said, acknowledging post-crisis reforms like risk retention and credit standards addressed core risks.
A firewall for EU investors
“Now, investors must act like proxy regulators,” Mr Bettney argued, citing “four levels of checking” for compliance including verifying STS (simple, transparent, and standardised) criteria – a concept he called “gold plating with questionable benefit.” “You need to verify issuer disclosures, document it, and prove it to auditors. No other asset class has this,” he said, calling the rules “incredibly prescriptive.”
Mr Bettney highlighted how non-EU issuer requirements stifle diversification. “US issuers, the largest securitisation market, don’t bother with EU formats,” he said. “European investors are precluded from diversifying portfolios.” When pressed on practical impacts, he explained that even within global firms like Janus Henderson, EU funds face restrictions. “US-domiciled funds can invest globally, but here we’re restricted. You’re sacrificing diversification and return.” He cited niche asset classes as exceptions: “Some originators structure deals to meet EU regulations, but large swathes of issuance don’t need to.”
Andrew Bryan, knowledge director at the law firm Clifford Chance, agreed. “EU pensioners aren’t getting the most diversified portfolios,” he said, forcing them to “take more risk” for comparable returns. Mr Baddeley added, “EU asset managers raising global funds avoid EU investors because they can’t buy Australian RMBS (residential mortgage-backed securities).”
Step in the right direction
Mr Bryan praised the reforms’ intent. “This is a big step in the right direction,” he said, noting reduced “proxy regulator” checks for EU deals. “Investors can now act faster on opportunities like distressed bonds trading at 20 cents on the euro.” However, he warned the reforms worsen global disparities. “EU investors still face un-level playing fields for non-EU deals,” he said, noting US investors face no equivalent hurdles. “The checking for compliance with EU standards is only proposed to be in respect of non-EU deals,” he added, creating a “disparity of rules” that disadvantages EU funds.
EU investors still face un-level playing fields for non-EU deals. — Andrew Bryan, knowledge director at Clifford Chance
Alexandre Linden of BNP Paribas highlighted insurer exclusion as a critical flaw. “EU insurers invest less than 0.5 per cent in securitisation versus 17 per cent in the US,” he said, blaming Solvency II capital rules, based on “spread levels at the worst time during the GFC.” Mr Linden called recalibrating these rules a “key proposal” to unlock insurer participation.
“If we can get an ambitious proposal for Solvency II, we’re getting very close to 10 out of 10,” he said optimistically. He also welcomed “risk-sensitive” capital floors allowing banks to transfer risk on lower-risk assets. “This opens a wider segment like consumer loans, not just risky SME (small and medium enterprise) debt,” he said, arguing this could broaden the market beyond traditional asset classes.
Huge potential sting
Mr Bettney then went on to flag two “real key issues” threatening demand. First, removing liability delegation forces pension funds to retain legal responsibility even when appointing specialists. “They wouldn’t process the information even if we provided it,” he said, deterring allocations. “Asset owners appoint us for our skill set, but they’d still bear liability,” he added, warning this could “limit the willingness of asset owners to allocate to securitisation.” Second, new sanctions propose penalties up to 10 per cent of global revenue for breaches. “No other asset class has this,” he said, calling it a “huge potential sting” that risks scaring off investors.
(Rules for simple, transparent, and standrdised compliance) are a gold plating with questionable benefit. — Ian Bettney, portfolio manager at Janus Henderson Investors
Mr Bryan agreed, noting “doubling up” penalties under sectoral and securitisation laws exacerbates risks. “Competent authorities can already impose penalties under existing legislation,” he said, arguing the reforms create redundant punishments. “If you’re trying to encourage new investors, this isn’t the way,” he added.
AFME’s Mr Baddeley shared these concerns, citing “worried compliance teams” among the association members. “Sanctions could cause capital withdrawal,” he said, which counters reforms meant to expand liquidity. He noted EU banks hold €5tn in HQLA (high-quality liquid assets), yet securitisation comprises just 0.5 per cent. “Eligibility criteria and haircuts limit ABS inclusion,” he said, though proposals introduce “resilience” standards to nudge progress.
Real money matters
When asked about post-2008 liquidity fears, Mr Bettney contrasted today’s “real money” investors with pre-crisis “levered vehicles”. During 2022’s LDI (liability-driven investment) crisis, he noted, “billions traded in very short order without market freezes.” He explained, “You could price a bond with a spread, not panic-driven fire sales,” citing how funds bought distressed ABS during margin calls. “In 2008–09, bonds dropped to 60 cents on the dollar because no one would bid. In 2022, spreads widened, but liquidity held,” he said, crediting a shift to “sticky money” from pension funds and insurers.
Mr Bryan credited transparency reforms for mitigating “anxiety about opaque assets,” making re-securitisations obsolete. “Post-GFC rules ensure you know what’s behind the bonds,” he said, contrasting this with pre-crisis opacity. Mr Linden criticised “extremely complex disclosure templates” as a barrier. “Originators had to provide hundreds of data points per receivable,” the French banker said, a hurdle the reforms simplify.
EU insurers invest less than 0.5 per cent in securitisation versus 17 per cent in the US. — Alexandre Linden, managing director, Securitisation Products Group at BNP Paribas
Mr Bryan then cited trade finance as an example. “A widget manufacturer using receivables for financing faces onerous templates,” he said, deterring efficient securitisation. “Reforms aim to reduce this, but more action is needed,” the Clifford Chance lawyer added.
Overall rating: guarded optimism
Mr Baddeley rated the reforms’ impact a “five-ish” without sanction fixes, cautioning, “The sanctions point is a real stifler.” BNP Paribas‘ Mr Linden was more optimistic: “If we recalibrate Solvency II and address sanctions, we’re close to eight out of ten.” Mr Bryan struck a middle ground, noting “market habits and familiarity” remain hurdles. “Regulation is only part of the puzzle,” he said, emphasizing the need to shift investor attitudes.
All the debaters agreed that third-country disparities must shrink. “Reducing bifurcation between EU and non-EU deals is key,” Mr Bettney insisted. “Firewalling EU investors contradicts the goal of scaling issuance,” he said, urging third-country rule alignment. However, he agreed with Mr Baddeley that wrapping this in “two lines is impossible.”
