Securitisation – the lessons from the crisis have not been learned

Brussels, 14 June 2016 – Proposals to revive securitisation could endanger financial stability while contributing little to the EU’s economy, warned Finance Watch at a public hearing yesterday evening in the European Parliament. The public interest advocacy group said it is essential to learn in full the lessons from the financial crisis.

Christophe Nijdam, Secretary General of Finance Watch, said after the hearing:

“The proposals under discussion now may increase the profitability of large banks but will contribute little in terms of economic value added to the real economy. Unless they are significantly amended, they could put the EU’s financial stability at risk and distract from the task of reviving growth in the real economy.

“Before the financial crisis, a well-known financier called securitisation “the crack cocaine of the financial services industry”. The proposals to revive the practice should be treated with caution, and undergo a thorough impact assessment that takes into account the impacts on society.”

The European Commission’s framework for “Simple, Transparent and Standardised Securitisation” contains two legislative proposals that would encourage a wide range of complex and opaque securitised assets. Securitisation was at the root of the 2008 financial crisis.

Mr Nijdam said:

“Despite its name, the Commission’s proposal is neither simple nor transparent, and fails to integrate the lessons from the crisis.”

For example, the proposal fails to fully address conflicts of interest, such as when banks cherry-pick loans to package into securities and sell to investors. As a minimum, the proposal should increase the so-called “skin-in-the-game” requirement to a vertical slice of 20% to ensure that banks’ interests are sufficiently aligned with those of investors. It should also exclude from the proposed STS framework so-called “arbitrage synthetic securitisation”, which add to systemic risk without bringing additional financing.

Frédéric Hache, Head of Policy Analysis at Finance Watch, said:

“There is no shortage of available funding for SMEs in most of Europe as we know from ECB surveys, and SME loan securitisation has always been a niche sector, even in the US. The proposal will therefore do little to help SMEs but it is likely to increase systemic risk and mortgage lending, which can lead to real estate bubbles.

“Lawmakers were right to question during the hearing whether this proposal integrates all the lessons from the financial crisis. The choice facing them now is whether to prioritise extending the public safety net for securitisation, to the benefit mainly of financial sector participants, or to focus on safer and more effective ways of supporting the real economy, such as promoting equity financing and traditional bank lending.”

Download Christophe Nijdam’s statement at the hearing.

Visit Finance Watch’s webpage on securitisation.

The Committee on Economic and Monetary Affairs (ECON) of the European Parliament organised the Public Hearing on Securitisation on Monday 13 June 2016 (programme, on Twitter #securitisation).