A recent report by Duponcheele et al. (2024) on European Competitiveness and Securitisation Regulations provides a comprehensive analysis of the current state of securitisation regulations and their impact on European competitiveness. The report offers several key findings, implications, and recommendations aimed at improving the securitisation market, which is vital for enabling the growth and competitiveness of Europe’s financial markets.
Capital Velocity and its Importance
The report highlights the concept of "capital velocity," referring to the ability of banks to redeploy their risk capacity multiple times through securitisation. This mechanism is crucial for banks to manage risks, create more lending headroom, and support large-scale investments, particularly in areas like climate action and productivity improvements. By improving capital velocity, banks can generate greater investment capacity, which is essential for the European economy's long-term growth.
Challenges with Current Regulations
A significant challenge discussed in the report is the misalignment between the current Securitisation Regulation and actual risks. The report criticizes the existing risk-weight (RW) floor as being too rigid, applying a constant percentage of notional value regardless of the underlying assets' actual risk. This approach leads to inefficiencies and discourages the use of securitisation as an effective tool for risk management and capital optimization.
Impact on European Investment and Growth
The inefficiencies in securitisation regulations have contributed to a stagnation in securitisation activities since the financial crisis, contrary to regulators' expectations. This stagnation has broader implications, as it hampers European banks' ability to optimize their balance sheets to support new lending and investment, thus constraining economic growth. More critically, these inefficiencies hinder European banks from fully engaging in financing the required activities necessary for the green transformation of the economy. Furthermore, without these changes, European banks risk falling further behind their US counterparts, widening the gap in financial competitiveness and innovation between Europe and the United States.
Recommended Regulatory Adjustments
The report argues for modest but targeted adjustments to securitisation regulations to better align them with actual risks. Key recommendations include the introduction of a risk-sensitive RW floor and changes to governance arrangements to ensure effective implementation of the regulatory framework. As Duponcheele et al. (2024) have outlined, such changes are not just beneficial—they are of high importance. They are necessary for European banks to stimulate the economy by financing the activities required for a green transformation and to close the competitive gap with their US peers. By creating a more coherent and responsive regulatory environment, these changes will support the objectives of the Capital Market Union (CMU), positioning European banks as leaders in global finance.
Revel Partners' Perspective
Revel Partners fully supports the findings of this report and strongly believes that these adjustments are essential for the securitisation market in Europe to grow significantly. The proposed changes are crucial for enabling banks to finance the critical investments needed for the green transformation, which is a cornerstone of Europe's future economic strategy. Moreover, these changes will empower European banks to compete more effectively on the global stage, helping to close the gap with US banks, which have leveraged more flexible regulations to their advantage. Revel Partners believes that these changes are not only beneficial but necessary to unlock the full potential of securitisation as a means to drive investment, economic growth, and competitive parity across Europe.
Potential Growth in the Nordics
The securitisation market in the Nordics presents a unique opportunity for growth, particularly in aligning regulatory frameworks with the region's specific needs. The Nordic financial markets, known for their stability and innovation, could benefit significantly from a more tailored approach to securitisation. However, it is crucial that the regulation is applied and assessed consistently throughout all of Europe, without specific gold-plating, to reduce associated regulatory uncertainty. By adopting the recommended regulatory adjustments, the Nordic countries could see a marked increase in securitisation activities, particularly in sectors such as green energy, infrastructure, and small-to-medium enterprise (SME) financing. The growth potential in these markets could not only enhance the local economies but also contribute to the broader European agenda of increased competitiveness and economic resilience.
The full paper by Duponchele et. al. (2024) can be found here.
