Today, the European Parliament approved new legislation on securitisation, intended to increase the transparency and stability of financial markets. The Commission had proposed a new label for “Simple, Transparent and Standardised” (STS) securities, in order to promote confidence in securitised financial products. This proposal was watered down first by the conservatives, liberals and eurosceptics of the European Parliament and later, during the trilogue, by the Council. The Council proved to be even less safety conscious than the Commission.
Securitisation was one of the main drivers of the recent global financial crisis. The practice allows banks to package loans, split them into several tranches and sell them off their books to financial markets. This leads to a loss of transparency in the financial sector, increasing the likelihood of market panics and deep financial crises.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“Today, a historical opportunity to reduce the financial risk from securitisation was wasted. Securitisation can serve a good purpose but only if risks are fully understood and bad incentives avoided. This is the latest example of political amnesia and regulatory rollback. The legislation will benefit complex banks and other finance firms, but neither the real economy nor ordinary citizens. While potentially leading to a false sense of security, the new rules won’t stop the uncontrolled spreading of poorly understood risks throughout the financial system. Supporting new securitisations is unsound with a higher risk retention rate.
It is unacceptable that the right-wing of the European Parliament, together with the Council, prevented a regulation that effectively addresses the downside of securitisation while catering the interests of the financial industry. They have not learned the lessons from the last financial crisis. Rules should be made to benefit citizens and the real economy, not an oversized and over-complex financial sector. The only gleam of hope is that we achieved to include an obligation to publish information on the long-term, sustainable nature of the securitisation.”
More ambitious and far-reaching proposals brought up by the Green group included a risk retention of 25%, meaning that banks would have to keep one quarter of the securitised loans on their books. This was to ensure that banks have enough skin in the game to prevent them from excessive risk taking. The initiative was supported by the rapporteur Paul Tang of the S&D group, however finally brought down by the conservative wing of the European Parliament. As a result, the current status of an insufficient retention of 5% stays in place which serves as an invitation to loading off bad risks.
The Greens attempted to discourage banks from investing in each others securities by requiring a 50% higher risk weight on those as compared to non-bank securities. It was suggested to force banks to calculate the risk weights of STS securities using the standard method only. Further proposals foresaw a limitation of the number of tranches in a “simple” securitisation to 3 tranches and promoted a ban on re-securitisations in which securities serve as the basis for additional rounds of securitisation.
All of this was successfully prevented by the conservatives, liberals and eurosceptics of the European Parliament, leading to a final legislation that brings no progress in terms of stability and transparency of financial markets.