European Securitisation Law: between a sustainable banking sector and the mitigation of emerging risks during the Covid-19 crisis

Abstract

Regulation of the securitisation process is an essential part of ensuring the stability of financial markets in the EU. Securitisation allows financial assets, such as individual loans, to be bundled into a tradable financial instrument - a security. In recent decades, securitisation of financial assets has taken on an increasingly important role in European and global financial markets. By creating instruments that can be collectively valued and transferred, financial institutions are better able to adjust their risk exposure to counter external and internal threats. However, during the financial crisis, market shortcomings, particularly in the area of mortgage-backed securities, led to a decline in the volume of securitised financial assets and caused turmoil in global financial markets. It is a central role of the acquis communautaire to protect the functioning of the internal market and thus the financial sector as an integral part of it. To this end, the EU legislative bodies are authorized to adopt measures for the approximation of provisions laid down by law, regulation or administrative action in Member States. As the securitisation process is an integral aspect of this sector, it is not surprising that the EU has established a strict regulatory framework. During the financial crisis, numerous weaknesses in this framework were revealed. This in turn led to continuous efforts by European legislative and regulatory authorities to improve the process, notably through Regulation (EU) 2017/2402, which introduced new principles for the securitisation market and expanded the obligations of market participants. However, this new regulation is put to the test, as new developments related to the Covid 19 pandemic and the associated rise in public and private debt are once again highlighting the need for an effective and transparent securitisation process. Based on these developments, the aim of this paper is to analyse the securitisation process from a European financial law and regulatory perspective and to assess whether the changes to the regulatory framework for the securitisation market have indeed contributed to more transparency and better regulatory oversight.