New EU "Gacs like" scheme
A proposal by 3 directors general of economic ministries
Three directors-general of European economic ministries wrote a letter to the European Commission requesting to revitalise securitisation. The proposal include a revision of capital requirements and the promotion of a guarantee scheme similar to Italian GACS and Greek Hercules Asset Protection Scheme.
In his report on the future of European competitiveness, Mario Draghi notes that banks in Europe cannot rely on securitisation to the same extent as their US counterparts.
So far, the EU securitisation market is far less developed than in the US. EU yearly issuance of securitisations stood at just 0.3% of GDP in 2022, while in the US it amounted to 4% of GDP [see Figure 7]. These differences arise partly from a stricter EU regulatory framework in terms of prudential requirements and transparency and disclosure rules, which go beyond requirements in the US.
Furtheromre , the EU lacks the equivalent of US government-sponsored enterprises (GSEs). GSEs have been crucial in fostering the standardisation of mortgage products across American banks and States, reducing transactions costs, lowering credit risks for both banks and buyers, and building a large and deep market.
To address these issues , major European countries, are pushing for a 'revitalisation' of securitisation. In a joint letter sent to the European Commission, three Treasury Directors-General from Italy, Germany, and France proposed two main actions:
a revision of capital requirements for banks and
the creation of an 'EU guarantee scheme' for securitisations.
This European guarantee, similar to the Italian GACS and Greek HAPS model, aims to facilitate access to private financing, channelling it towards projects of common interest, such as green and digital transition.
This would be an important step to improve the standardisation of financial instruments, reducing transaction costs and increasing market transparency. In addition, the introduction of this guarantee could reduce the perceived risk for investors, encouraging a greater flow of capital into European securitisations.
However, it must be considered that dismantling of the market and banking regulation beforethe 2007-2008 and the abuse of securitisation that followed deregulartion caused led to the great financial crisis . Through this instrument, whereby loans and assets of banks are packaged and transformed into tradable securities, risk was spread globally in an opaque manner. When the US housing market collapsed, the whole house of cards built around the instruments crumbled, leading to one of the most serious financial crises in history.
Therefore, to fully exploit the benefits of securitisation for capital market development, vigilant market supervision and prudent banking regulation should remain in place.
Despite past risks, securitisation has significant potential, especially in terms of flexibility for banks. With proper regulation, securitisation can contribute to:
Making banks' balance sheets more flexible: allowing them to transfer part of the risk to investors, freeing up capital for new loans.
Support the development of capital markets: by attracting investments not only from within the EU, but also from international investors.
Financing the green and digital transition: by using private capital for large-scale projects that are necessary for Europe's future.
Securitisations, despite their turbulent past, are still a useful tool for managing banking risk and financing projects of strategic interest. The introduction of a European guarantee could be the key to making the most of their potential, promoting a more transparent and integrated market at continental level.
If the EU Commission is able to seize this opportunity, securitisation could once again play a central role in Europe's economic recovery, helping to finance the green and digital transition and make the banking system more robust.
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