Europe securitisation reform could help narrow funding gap

Traders Union
All News
Financial News
Europe securitisation reform funding gap

Highlights

Europe's securitisation market amounts to 0.3 per cent of GDP versus 4 per cent in the U.S., constrained by a 10 per cent Ucits issuer cap.
Removing the Ucits cap could unlock about €150bn of pent-up demand and €30bn annually, while a 20 per cent cap would only add €20bn.
Broader securitisation reform could diversify funding sources, reduce systemic risk, and help address Europe's €1tn annual funding need.

Securitisation reform and investment constraints

As reported by Financial Times, Europe’s current approach to securitisation is falling short even though policymakers broadly agree that deeper capital markets are essential to support growth and reduce reliance on banks.

Securitisation allows banks to bundle loans such as mortgages, car finance and small business credit, then sell them to investors as bonds. By moving those assets off their books, banks gain more room to extend fresh lending, while investors can access diversified income-producing assets.

The article argues that Europe’s market remains severely underdeveloped, amounting to about 0.3 per cent of GDP versus 4 per cent in the U.S. It says this gap reflects regulatory choices, especially rules that prevent large Ucits funds from investing in securitisations at scale because they cannot buy more than 10 per cent of the bonds from any one issuer.

That limit dates from 1985 and was designed to stop mutual funds from gaining corporate control, but the article says it is poorly suited to securitisations, which were not part of the market structure when the rule was created. The European Parliament has proposed lifting the cap to 20 per cent under the Savings and Investments Union, but that change is described as too limited to materially address Europe’s financing challenge.

Potential capital market impact in Europe

Supporters of a broader reform case say securitisations have become safer since the 2008 financial crisis because underwriting standards, risk retention requirements and investor transparency have all been strengthened. Much of the credit in this market is also described as higher quality, including triple-A rated and investment-grade paper, with near-zero defaults in Europe and the U.S. over the past 15 years.

The article also points to performance and liquidity benefits, saying the U.S. securitised fixed income market has outperformed high-quality corporate bonds through the five most recent stress periods since 2015. Liquidity in securitisations is also said to have improved and become more comparable with corporate credit.

Removing the Ucits cap for securitisations could unlock about €150bn of pent-up demand from asset managers and about €30bn a year after that, according to the figures cited in the article. By contrast, a 20 per cent cap would add only about €20bn to the market, or roughly 2 per cent of Europe’s €1tn annual funding need, leaving a much larger gap unresolved.

The broader argument is that stronger reform would not only expand funding capacity but also diversify Europe’s financing sources, reduce systemic risk and support businesses, savers and retirees. Without more ambitious action, Europe’s weaker growth relative to the U.S. is likely to persist or widen.

In our earlier coverage of the Driver UK Master SA Compartment 6 tap, we explained how the transaction added £244.1 million in follow-on issuance and received final ratings reflecting improved collateral quality. We also highlighted that the extra liquidity was intended to support ongoing servicing and that investor demand in UK structured finance continues to hinge on collateral strength and disciplined credit management.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.