Securitisations: a push for safety and simplicity

19 February 2025

Securitisations can play an important role in the EU’s financial markets and the economy. They can be effective in channelling money from capital markets into projects and in redistributing risks across the entire financial system. In addition, securitisations can be a useful tool for banks to manage credit and concentration risk. Banks generally use securitisation to reduce the amount of capital they are required to maintain from a regulatory perspective or for funding purposes. But if not managed adequately, securitisations may also pose severe risks to individual banks or the banking sector as a whole, as seen during the global financial crisis of 2007-09.

Banks are only allowed to reduce their capital requirements when the supervisor acknowledges that the securitisation transfers a significant amount of risk to third parties – this is known as “significant risk transfer” (SRT). This requires a positive SRT assessment from the competent authority, acknowledging that risks have been transferred and will not be re-assumed by the originating bank during the lifespan of the securitisation.

Over the past year the ECB has developed a fast-track process for the supervisory assessment of SRT. This work has been done in close dialogue with the European Banking Federation. The SRT assessment of an individual securitisation transaction currently takes about three months. The fast-track process aims to substantially reduce this time for sufficiently simple securitisations meeting certain requirements. Supervisors will save time leveraging on product standardisation and harmonised templates. For complex and innovative securitisations the ECB will continue to carry out a detailed assessment and scrutinise whether a significant transfer of risk has been achieved. Efficiency will not come at the cost of resilience: fast-tracked transactions will be assessed against all applicable provisions of the existing regulatory framework. In this vein, the fast-track SRT process is a good example of how processes can be simplified within the existing regulatory framework.

The new fast-track process will be tested by the ECB in the first half of 2025. The testing phase will be crucial, both to see whether the new process brings the expected benefits, including a shift towards further simplification and standardisation, and also to check that the eligibility criteria and templates are fit for purpose. It is now up to banks to carry out simple securitisations to ensure that the new fast-track SRT process can be widely used.

The review of individual transactions will be accompanied by ex post checks and a regular monitoring of banks’ securitisation activities, complementing the regular assessment of their securitisation-related risk management and governance arrangements. The ECB expects banks to adequately manage the risks related to their overall securitisation activities and integrate those risks in their internal processes. This includes, for example, appropriate stress testing and taking securitisation activities into account in capital planning and risk management.

Another important element of the ECB’s analysis is understanding who ultimately bears the risks and whether they are adequately managed. For example, if banks were providing leverage for credit funds to invest in securitisation, this could result in substantial hidden risks being retained in the banking system – with lower capital coverage overall. That raises prudential concerns. Banks are expected to identify and mitigate risks linked to interconnectedness with securitisation investors. The ECB will continue to monitor market developments to detect any adverse trends and malicious behaviour at an early stage. Enhancing reporting and disclosure requirements for non-bank financial institutions would, among other objectives, facilitate the identification and monitoring of interconnections stemming from securitisations.

The use of simple securitisation products could have beneficial impacts on the securitisation market, as highlighted in the ECB’s staff contribution to the European Commission’s targeted consultation on the functioning of the EU securitisation framework. Long-term market development requires a genuine transfer of risks outside the banking sector, to a diversified investor base that is able to manage those risks. The use of simple and standardised products will help the development of the market while also supporting financial stability and attracting new investors. In contrast, complex securitisations and opaque structures may maximise the profitability of an individual transaction, but tie up the resources of banks, investors and supervisors – and ultimately do not provide any additional benefits to the financial sector or the broader economy. At the same time, they complicate monitoring and could impair financial stability and market functioning.