Debate: General framework for securitisation and specific framework for simple, transparent and standardised securitisation to help the recovery from the COVID- crisis – Amending Regulation  No  as regards adjustments to the securitisation framework to support the economic recovery in response to the COVID- crisis
Date: WEDNESDAY, 24 MARCH 2021
Speaker: Paul Tang
Country: Spain
Language: EN

And these are useful products, remind us of that, because you don’t want to put all your eggs in one basket and they otherwise help to increase the financing of the real economy, and in our current COVID crisis this is exactly what we want. And this is why Parliament was happy to engage when the Commission proposed an impetus to Europe’s securitisation market. The market itself is currently not big, it’s rather small, and small not because of the restrictions of the current legislation but also mainly because of the abundance of cheap alternatives for financing loans as a result also of the ECB’s monetary policy. So it remains to be seen what the proposed changes in the legislation will deliver, but in a crisis every bit counts. And the Commission proposed to make it easier to sell off non-performing loans, something of increased importance in the years to come, and it also proposed to expand the STS label for simple, transparent and standardised securitisation to a new class of synthetic securitisation. This would give capital benefits to certain types of products that were not the loans themselves but only their revenue streams that are sold off. Parliament, like I said, was happy to engage in this but is always aware of the dangers. Selling of loans can be a way to hide internal weaknesses or exposing others to unexpected risks. And we saw exactly this in the recently bankrupted Greensill bank. They issued risky loans but sold them off in packages, largely risk free. This went well until Credit Suisse noticed that in fact most of these loans were made to a single materials company close to bankruptcy. Credit Suisse pulled out, everyone pulled out, and Greensill went under. It’s a classic example. And the main worry should be not these individual cases, but that these individual cases do not become a systemic risk. Spreading risk is the aim of securitisation, but as history shows us, it may also lead to a concentration of risk if not well regulated and if not well supervised, and that remains crucial. We don’t want the financial market to turn into one big domino day, when suddenly abstract complex products cause very real harm to our citizens.  This is what Parliament wants and wanted to avoid, so we pushed for changes to the Commission proposal. We’ve always mandated supervisors to closely monitor risks, including systemic risks, and give warning signs when things get out of hand. We are also very much focused on the structure of securitisation to avoid problems arising in the first place.  First, the issuing bank should always maintain a material exposure to the loans to avoid wrong incentives. Second, we minimised counterparty risk, this way investors don’t need to suffer if an issuing bank goes down like Greensill did. And third, we further simplified the structure of the financial products to avoid them being used to trick the supervisor. These changes make for a safer European securitisation market, but financial markets shouldn’t just be safe: they should also help us to move forward towards a sustainable and fair economy and to promote sustainability we mandated the European Banking Authority to develop rules for sustainable securitisation, which should be put in place when the larger review of the regulation comes into question at the end of the year. To promote a fair economy we included strong safeguards against tax avoidance – safeguards that turned out to be so strong that Australia has already – even before the law was voted upon – committed to putting an end to its harmful tax regime of offshore banking units. The risk of reduced access to European financing set off alarm bells on the other side of the world in a clear sign of the strength of the European market.  To conclude, with this text we can achieve the best of three worlds: a stronger economic recovery; good checks on potential risks; and a contribution to a fair and sustainable economy.  Finally I would like to thank my co-negotiators Othmar Karas and Luis Garicano, and their teams of course, for what was not always an easy process given the time pressure. And I would like to thank the Commission’s departments and the Council Presidency very much for a constructive approach up until the very end. It is now up to our financial markets to make the most of the tools given to them and support our economy through these difficult times.