Europe’s securitisation debate is still shaped by a crisis that wasn’t Europe’s. The securitisation that caused the 2008 financial crisis was a uniquely American process. Europe does something fundamentally different.
Fannie Mae, a US government-sponsored mortgage company, has obtained a formal legal opinion confirming that its guaranteed mortgage-backed securities do not qualify as a securitisation under EU law, because they contain no credit tranching.
This reflects a deeper structural divide between the two systems. “In the EU, tranching is the thing, and the income stream is the add-on. In the US, it’s the opposite,” said Rebecca Christie, Senior Fellow at Bruegel, a Brussels-based economic think tank.
Securitisation is the pooling of loans—typically mortgages—and turning them into tradable securities that transfer credit risk from banks to investors. Under EU law, a securitisation is more tightly regulated. It must be sliced into tranches with different levels of risk. In the US, it is more market-driven with greater flexibility.
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Mortgages bundled by Fannie Mae (Federal National Mortgage Association) and its ‘twin’ Freddie Mac (Federal Home Loan Mortgage Corporation) promise investors a fixed return, and absorb any default rate above expectations. The loan leaves the bank’s balance sheet and the income stream becomes the point.
Tranching optional
Unlike in the EU, tranching in the US system is optional — an add-on for investors who want to calibrate their exposure. The result is that the backbone of the US mortgage market doesn’t even qualify as a securitisation under EU rules.
Europe’s comparative advantage lies in synthetic securitisations. Loans stay on the bank’s balance sheet and only the risk is transferred to investors. Europe has built a technically sophisticated market that does something fundamentally different from what Americans mean when they use the same word.
“We can see that the EU securitisation market has developed a strong preference for synthetic securitisation, which reflects the specificities of the European financial sector,” the European Central Bank (ECB) Supervisory Board member Pedro Machado said in a speech. “These developments, rather than the benchmark of the US market, should drive our rulemaking process,” he noted. Yet much of the European debate remains anchored in the experience of the global financial crisis.
The 2008 ghost
An underlying fear for European regulators is that loosening securitisation rules risks recreating the conditions of 2008.
But the crisis back then was driven by a specific pathology: US banks originating loans to borrowers who couldn’t afford them, packaging them into securities, obtaining fraudulent AAA ratings, and selling them to investors who had no idea what was inside. When defaults cascaded, the entire structure collapsed.
In 2008, European mortgage origination didn’t work that way, and didn’t produce those outcomes. “The mortgages securitised originated in Europe had losses that were negligible… next to nothing,” said Gonzalo Gasos, Senior Director of Prudential Policy and Supervision at the European Banking Federation.
Aversion to financial risk
The reason is structural as much as it is cultural. European mortgage law, rooted in the Napoleonic civil code tradition, gives lenders full recourse to both the property and the borrower’s assets and income.
Unlike the US ‘walkaway’ option—where a borrower can simply hand back the keys if the property falls below the loan value—European borrowers remain liable. That legal architecture makes European mortgage origination fundamentally safer, regardless of what the securitisation rules say.
Europe’s caution around securitisation also reflects a broader cultural aversion to financial risk. ECB research found that more than 70 per cent of euro area households are unwilling to take any financial risks, compared to below 40 per cent in the United States.
The result is capital markets are over five times GDP in the US. In major European economies, it’s only between one and two times GDP, according to Oliver Wyman, a US management consulting firm.
What securitisation could actually do
Beyond the risk debate, securitisation has the potential to move well beyond mortgages in Europe to unleash real capital potential. Green energy loans are the obvious candidate.
The problem is standardisation: windmill loans, solar loans, and other clean energy financing vary too much in their terms and rates to be bundled reliably. Which is exactly where the government has a role to standardise the market.
“Governments can come in and say, look, we’ll offer a 3 per cent first loss. And with that, the riskier windmill loans start to look more like the regular windmill loans. Once the loans all look alike, you can bundle them,” Christie said.
A government first-loss guarantee standardises the risk profile enough to make bundling possible. None of that is on the table in the current trilogue, but with incremental progress, a broader European securitisation is possible, one that aids Europe’s green transition.
Securitisation, while the same word on both sides of the Atlantic, is not the same thing in practice. The ambition behind it can follow suit.
