ECB supervision backs securitisation revival, warns on insurance-linked structures and lower capital floors

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ECB backs securitisation revival

Highlights

ECB Supervisory Board's Pedro Machado supports securitisation market revival if safeguards are maintained, noting synthetic securitisation volumes nearly doubled from 2022 to end-2025.
Machado warns that the proposed treatment of unfunded credit protection by insurers in the STS label may not reflect default risk and departs from ECB recommendations.
Machado urges maintaining absolute risk-weight floors on senior tranches above 7%, cautioning that lower levels for resilient STS securitisation risk weakening prudential safeguards.

Securitisation safeguards and capital concerns

As reported by European Central Bank Banking Supervision, citing the ECB Supervisory Arm, Pedro Machado, a member of the ECB Supervisory Board, says securitisation is a legitimate and efficient tool for banks to manage capital and credit risk if transactions are properly structured and deliver significant risk transfer. He says the European Commission's proposal to revive the market could support lending and capital market activity in Europe, but only if safeguards are maintained and risks are transparently addressed.

Machado says supervisors are broadly agnostic between synthetic and cash securitisation provided governance, risk management and protections are robust. He notes that synthetic securitisation activity has grown sharply, with transaction volumes almost doubling between 2022 and the end of 2025 and underlying exposures more than doubling, but warns that counterparty credit risk remains a crucial issue, especially when protection is unfunded.

He also raises concerns about the preliminary political agreement to give insurance companies a larger role in synthetic securitisations qualifying for the STS label. While he says the deal contains positive elements, he argues that the proposed treatment of unfunded credit protection from insurers departs from the ECB's recommendation and may not reflect the risk that an insurer could fail to honour that protection.

On capital rules, Machado says the ECB has argued for absolute risk-weight floors on senior positions rather than risk-sensitive ones. He says supervisors would prefer not to see senior tranche floors fall below 7%, adding that the level envisaged for resilient STS securitisation may be too low and could weaken prudential safeguards.

Broader banking risks from AI, liquidity and market integration

Machado says supervisors are monitoring a growing use of platforms by non-bank financial intermediaries to repackage synthetic securitisations, with insurance companies taking credit risk from credit-linked notes while banks provide financing for the notes. He says the trend first appears at the end of 2024 and grows in 2025, and warns that rising complexity, opacity and tighter links back to the banking system could trigger more intensive supervisory assessment and disqualify transactions from fast-track SRT treatment.

He says the ECB is also examining how banks finance AI-related exposures, including data centres, as part of a wider supervisory focus on credit risk and underwriting standards. Machado says data centre lending spans land acquisition, development, construction and operation, with links to both real estate development and energy sustainability, and that supervisors are assessing how those risks are priced and reflected in credit decisions.

On AI adoption inside banks, Machado says around 85% of banks already use generative AI across areas such as fraud detection, know-your-customer checks, transaction monitoring and credit scoring. He says frontier AI models are also changing cyber security risks by shortening the gap between vulnerability discovery and exploitation, making swift patching and stronger cyber hygiene more important, while a fuller supervisory assessment depends on banks' action plans due by the end of October.

Machado says digitalisation can raise the potential for deposit volatility, though ECB research does not show that greater use of online banking or apps has so far made deposits more unstable. He says AI agents that move customers toward the best deposit rates could amplify that risk, but banks may also use AI-driven pricing and personalised offers to counter it.

He also reiterates the ECB's case for a more integrated banking market in Europe, saying lending in the banking union remains overwhelmingly domestic and that cross-border corporate lending is still limited. Machado says roughly 230 billion euros of high-quality liquid assets are trapped at subsidiary level and could support the real economy more effectively if they could move across borders in a fully functioning banking union with the right safeguards.

On the European Commission's wider simplification agenda, Machado says policymakers should take a holistic view of resilience before softening regulatory backstops such as the output floor or Pillar 2 Guidance. He says changes to capital requirements and securitisation rules may increase capital relief for banks, but supervisors should avoid blurring the line between useful simplification and a reduction in banking system resilience.

Our earlier coverage of the IMF’s October outlook highlighted that Europe’s recovery remains uneven, with improving prospects in Germany and the UK, relative strength in Spain, and continued weakness in France. We noted that persistent inflation, tight fiscal room, and competitiveness gaps are shaping credit-market sentiment and borrowing conditions, leaving weaker economies more exposed to higher financing costs and shifting trade patterns.

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